The Reliance Worldwide Corporation Ltd (ASX: RWC) share price is bucking the coronavirus-induced market sell-off today!
Shares in the plumbing products jumped 1.8% to $3.48 in the last hour of trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index slumped 1.7%.
The selling is indiscriminate with just about every sector is wallowing in the red.
Reliance Worldwide's gains may not look that impressive compared to the 8% plus gain by the Appen Ltd (ASX: APX) share price or the 5% advance by the oOh!Media Ltd (ASX: OML), but there's still plenty of room for RWC to climb, according to UBS.
Upgraded despite profit miss
The broker upgraded the stock to "buy" from "neutral" following the company's weak first half results.
Management posted an interim net profit of $64 million, which was below its guidance of around $71 million. This was largely due to the poor performance of its US operations.
"The weaker than expected result was driven by soft US revenues," said UBS.
"US revenue growth (1.1% vs UBS-e 9%) was adversely impacted by de-stocking of key Sharkbite products by wholesaler Fergusons as they pivoted to higher usage of private label.
"The impact from the de-stocking led to ~US$7-8m less revenue, ~2% of group vs initial target of ~1%. While it sounds small, it was enough to trim US revenue growth by 300bp to 1.1% y/y."
Destocking leads to de-rating
Investors are understandably nervous about destocking events even though management claims such events are a normal part of the business cycle as wholesalers go through periods of stocking and destocking. Also, it's believed that Fergusons continues to stock other products from Reliance Worldwide.
US sales were hampered by weak take-up of new products and timing of promotional activities. This is worrying but the collapse in RWC's share price more than compensates for the uncertainty, according to UBS.
The stock lost nearly 30% over the past 12 months when the ASX 200 gained 11%.
Bad news more than priced in
"FY20 guidance has been lowered ~8% to A$140-150m, and we model US revenue growth in 2H-20 of 7%," said the broker.
"This is in keeping with RWC's comments that US revenue growth should lift with the timing of promotions."
UBS' 12-month price target on Reliance Worldwide is $4.20 a share.
