Reliance Worldwide Corporation Limited (ASX: RWC) is set to list on the ASX next week at an issue price of $2.50 per share, making it a $1.3 billion company.
According to The Australian, the institutional offer was significantly oversubscribed at the top of the range (the indicative price range was $2.27 to $2.50) and makes Reliance the largest float on the ASX in 2016 so far.
2015 saw two billion-dollar listings, Link Administration Holdings Ltd (ASX: LNK) and Myob Group Ltd (ASX: MYO) in total, although you could include BHP spin-off South32 Ltd (ASX: S32) and NAB spin-off CYBG PLC (ASX: CYB).
Reliance provides plumbing supplies and water flow products to Australia, New Zealand, Canada and the US and is expanding into Europe. Most of its products are used in ‘behind the wall’ plumbing and hot water systems, and are sold through both wholesale and retail channels as well as to equipment manufacturers. The company expects to generate pro-forma revenues of $534.9 million and earnings before interest, tax, depreciation and amortisation (EBITDA) of $97.8 million in the 2016 financial year (FY16).
It certainly looks like an interesting business, although I’m wary of any company coming to market so that the sellers can realise their investment in the company (whether its private equity firms or anyone else). If it’s that promising, why are they selling now?
The prospective P/E ratio of 25.6x estimated FY16 earnings doesn’t leave much on the table for incoming investors either, and the 2.4% dividend yield is unappetising. However, based on the IPO price of $2.50 and the company’s forecast for FY17, the P/E ratio drops to around 21 times.
Given the success of recent floats like Link, WiseTech, MYOB and Medibank Private Ltd (ASX: MPL), even after coming to market with big P/Es suggests Reliance will probably see its share price soar.
Perhaps its closest comparable company is Reece Ltd (ASX: REH), with a market cap of $3.5 billion, which also happens to be a plumbing and bathroom products supplier in Australia and New Zealand (and a customer of Reliance’s). Reece currently trades on a trailing P/E ratio of around 20x – but has a long and stable history on the ASX behind it – and generated more than $2 billion in annual revenues in FY15.
Safe, boring companies like Reliance and Reece that can continue to deliver gains year after year in all manner of economic conditions should be highly sought after by investors as a core holding in their portfolio – at the right price of course.
Investors that are confident Reliance can meet it or even surpass its prospectus forecasts probably won’t be disappointed paying a price of around $2.50.
The Motley Fool Australia owns shares of WiseTech Global. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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