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Can Reece Ltd (ASX: REH) conquer this US$80billion market?

USA Investing

Reece Ltd (ASX: REH) announced its FY 2018 results today with the plumbing and bathroom supplies business delivering record net sales. Here are the highlights from the announcement.

  • Sales were up 10.7% to $2,689 million
  • Net Profit was up 6.1% to $225 million
  • A full year 100% franked dividend of 20.25 cents per share was announced (a 1.6% yield based on the latest share price)

Sales were boosted by 12 new Reece outlets that were opened across Australia and New Zealand during the year as well as 16 new stores from the acquisition of Viadux and Heatcraft New Zealand.

California dreaming 

Despite the solid result which cemented a compounded annual profit growth rate of 16% since FY 2014, Reece shares were only up marginally following the announcement.

This is not surprising as the share price has run up 25% since the beginning of the year, buoyed particularly by the acquisition of the US-based plumbing and HVAC product distributor, MORSCO.

Given MORSCO’s annual revenue of A$2.3 billion (compared to Reece’s A$2.7 billion revenue), this is the biggest transaction in Reece’s history and has the potential to either maintain the company’s impressive growth story or destroy a significant amount of shareholder wealth.

Reece shares are priced for growth (although not as high as technology companies) with a PE ratio of 29 compared to the market average of 17 and the sector average of 16. As such, given the company’s domestic dominance, it needed to search for new markets overseas for growth and there is no larger market than the US.

MORSCO is a top five supplier of plumbing, waterworks and HVAC products in the US market which is estimated to be US$80 billion. It is particularly dominant in 16 “sun belt” US states including California, Texas and Florida, where growth is higher than the national average. On paper, there is a lot to like about this deal and a lot to look forward to for Reece shareholders.

There are however a few risks for shareholders to consider. MORSCO was sold by top private equity group Advent International and the private equity industry is not known for selling assets that still have a significant amount of growth in them. Aussie companies also have a mixed record with overseas expansions.

Australia and New Zealand Banking Group (ASX: ANZ) and Wesfarmers Ltd (ASX: WES) have struggled whilst Breville Group Ltd (ASX: BRG) and Collins Foods Ltd (ASX: CKF) have had some success.

Reece has compounded shareholder wealth over the years through smart acquisitions and if it can add MORSCO to the list of success stories, there will be much more upside for today’s shareholders.

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Motley Fool contributor Kevin Gandiya has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool Australia has recommended Collins Foods Limited. 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 Scott Phillips.

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