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The Reliance share price is rocketing up despite drop in net profit. Here’s why.

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The Reliance Worldwide Corporation Ltd (ASX: RWC) share price surged more than 23% in early trade today. That’s despite the plumbing supplies company recording a significant drop in profit for FY20.

How did Reliance perform in FY20?

In its financial report released today, Reliance headlined a 33% drop of $89.4 million in net profit after tax (NPAT) for FY20. Reliance also reported an 18% drop in adjusted NPAT of $130.3 million. Earnings before interest, taxes, depreciation and amortisation  EBITDA were $217.9 million.

Despite the hit to earnings, Reliance recorded promising revenue figures for FY20. The company highlighted a 5% lift in net sales for FY20 of $1.16 billion. However, the coronavirus pandemic heavily impacted sales in the second half of FY20, with sales performance varying across regions.

Reliance sales in the US fared well during the pandemic, with a 13% lift in FY20 net sales for the region. Sales in the Australian market saw a small growth of 2%. However, sales in Europe, the Middle East and Africa dropped 20 per cent in the second half due to the coronavirus restrictions, and fell 10% for FY20.

Reliance cited a slowdown in global residential construction due to COVID-19 for its performance in FY20. Reliance management said despite growth in demand, the company’s performance was hampered by supply chain challenges and different market responses to the pandemic.

Although Reliance reported a significant drop in net profit, the company declared a final dividend of 2.5 cents per share.

Outlook for the Reliance share price

Given the uncertain market outlook and potential impacts of the COVID-19 pandemic, Reliance did not provide earnings guidance for FY21. However, the company expected core end-markets to remain resilient in the 2021 financial year.

Reliance highlighted a 22% lift in sales in the US in July 2020. The company also noted a slight increase in sales in the APAC region and reported that sales were recovering in Europe, the Middle East and Africa.

In addition, the company said it had undertaken several restructuring initiatives in FY20 to support future growth. This included the closure of its Tennessee manufacturing facility and restructuring of activities in the UK.

As a result, the company expected to deliver annual cost savings of $25 million by the end of 2021. Synergies from its recent acquisition of John Guest were also expected to deliver annual savings of about $31.3 million by the end of year.

Foolish Takeaway

At the time of writing, the Reliance share price is trading more than 17% higher for the day. Shares in the company have been sold-down slightly after hitting an intra-day high of $3.54 earlier.

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Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Reliance Worldwide Limited. The Motley Fool Australia has recommended Reliance Worldwide 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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