Shares in Reliance Worldwide Corporation Aus P Ltd (ASX: RWC) – Reliance Worldwide for short – have fallen substantially from recent highs of $3.40 to $2.91 at yesterday's close.
Although undoubtedly more attractive at these prices, $2.91 is still significantly above the $2.50 that the company debuted at. I'm not sure they are good value at today's prices, but the company itself is definitely worth a closer look.
What I like:
There are several things I noted in my research. First, the company's lead Sharkbite product appears to be a good one – there are some interesting videos on the Reliance website that demonstrate the benefits. Second-hand reports from plumbing and home improvement forums also suggest that SharkBite fittings are among the best. It's not the only product however, and has competition from at least two other brands, Blue Hawk, plus GatorBite and/or TecTite which may be owned by the same company.
Now, SharkBite seems like a winner. It's got a variety of certifications including for 'hidden' (e.g. inside a wall) applications. It is light years ahead of competitors in terms of its internet presence (GatorBite doesn't have a website that I could find) and has YouTube videos showing potential uses, etc. This will prove essential in reaching new plumbers and home handymen in convincing them to use Reliance products.
Reliance was recently named sole Push-To-Connect (PTC) supplier to Lowes Hardware in the US, which will presumably result in the departure of the Blue Hawk products that are currently sold there. This evidence of SharkBite being favoured over the incumbent is compelling. On the downside, Reliance recently lost its sole PTC supplier status with The Home Depot, as a result of the change of control effected by the IPO. That will most likely result in side-by-side competition from other brands at Home Depot, which could hurt.
This is because SharkBite fittings are seemingly very expensive, both compared to 'vanilla' brass fittings and also to competing PTC products. Although the price might turn some buyers away, the convenience and time savings appear significant. Labour savings alone probably account for the increased cost of the items, but I'm not sure how well SharkBite will compete against seemingly identical fittings available side-by-side on store shelves.
Presumably customers (especially professional plumbers and possibly building insurers) will vote with their feet on the best item, but that is something that will require further investigation.
Generally speaking I would believe that for plumbing fittings, reliability and quality is the primary concern, especially for applications inside walls. The time savings for PTC fittings, especially when having to apply multiple connectors at one time, are also significant. What I don't know yet is if SharkBite is the best in this regard. Although I have banged on a lot about SharkBite in this piece, investors should also note that Reliance has multiple products, and more under development.
What I don't like:
First, shares are not cheap, trading at 30 times its pro-forma Net Profit After Tax (NPAT) for 2016. Prudent investors will be aware of the company's limited financial history since listing.
Second, Reliance is a manufacturer. It differs from Reece Ltd (ASX: REH) in that SharkBite designs and sells the products to retailers like Home Depot, who re-sell it to customers. This means both that SharkBite has key customer risk, and also that it has all the drawbacks of a manufacturer including exposure to materials prices, wage/labour disputes, high inventory requirements, and so on. Some of these issues are partly mitigated by having multiple factories in diverse locations.
Third, is the potential for greater competition. I touched on this above, but it seems there could be potential for polyethylene ('poly', i.e., black plastic) fittings to take over from brass in some areas. Some poly PTC fittings are rated for 16 bar of pressure, which is equivalent (actually greater than) the 200 psi that SharkBite is rated at. It would take a Herculean effort to convince customers that poly could be better than or equal to brass, but the potential for this cheaper, albeit uglier, alternative should not be overlooked.
The fourth issue is Reliance's relatively high profit margins. These suggest Reliance can use its proprietary fittings to achieve above-average margins. This is exactly what investors should be looking for. However, I am conscious that an IPO can do strange and wonderful things to a company's business model as presented on paper. I would want to investigate its margins a bit further, especially with an eye to competition and manufacturing/labour costs.
Foolish takeaway
On the face of it, Reliance has a win-win product in SharkBite. It's easy and fast, likely saving both time and potentially money in labour expenses. I think the company is worth closer investigation. My next step would be to check out management's qualifications, the company's financial position, and evaluating SharkBite and competitors' certifications or possible uses.
