Reliance Worldwide (ASX:RWC) share price falls despite acquisition news and trading update

This plumbing parts company’s shares are under pressure…

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The Reliance Worldwide Corporation Ltd (ASX: RWC) share price is falling on Tuesday.

In morning trade, the plumbing parts company’s shares are down 0.5% to $5.15.

Why is the Reliance Worldwide share price falling?

The Reliance Worldwide share price is falling on Tuesday following the release of two announcements.

The first reveals that the company has entered into an unconditional agreement to acquire EZ-FLO International for US$325 million.

The release notes that this reflects a 12x multiple of EZ-FLO’s pro forma adjusted operating earnings before synergies, and 7x pro-forma adjusted EBITDA including expected revenue and cost synergies.

EZ-FLO is a leading manufacturer and distributor of plumbing supplies. This includes plumbing specialty products, appliance supply lines, flexible water connectors, gas connectors, and other accessories.

It was established in 1980 and has grown rapidly by continuously expanding its product range. This includes through the acquisition of the EASTMAN brand in 2000, which is the leading brand in large appliance connectors in the US.

Management notes that taking control of the EASTMAN brand will immediately position Reliance Worldwide as a leader in supporting all those who service major appliance installations. This includes plumbed appliances, gas, hot water, and dryer venting.

The acquisition will be funded through debt, utilising headroom within the company’s existing syndicated facility agreement. This is expected to result in the company’s pro-forma Net Debt to Pro Forma EBITDA ratio increasing to 1.78x from 0.62x.

Reliance Worldwide’s Chief Executive Officer, Heath Sharp, commented: “The acquisition of EZ-FLO is strongly aligned with RWC’s strategy of adding complementary products that broaden the depth of solutions offered to end users and expand our market presence in aligned sectors. Together, we manufacture some of the most trusted brands in the industry, including SharkBite, HoldRite, John Guest, Speedfit, Cash Acme. With EZ-FLO and EASTMAN, the number one brand in the U.S. appliance connector market, we will be positioned as a leader in supporting all those who service Major Appliance installations.”

Trading update

Possibly holding back the Reliance Worldwide share price today was the release of a trading update which revealed modest first quarter growth. This reflects the company’s battle with supply chain headwinds and the cycling of strong sales and profit growth in the prior corresponding period.

According to the release, net sales increased 8.3% over the prior corresponding period to US$246 million, whereas adjusted earnings before interest and tax (EBIT) grew just 3.9% to US$55.4 million amid margin pressures.

Mr Sharp commented: “The demand drivers associated with increased repair and remodelling activity have continued to underpin volumes, and the significant step up in demand we saw in FY21 has consolidated at these higher levels. Looked at on a 2-year comparative basis, our first quarter sales were 29% higher than for the same period in FY20.”

“Supply chain constraints including shipping delays, freight and logistics disruptions, and raw materials shortages, have all been headwinds in the first quarter that have suppressed volume growth. While these have not always impacted RWC directly, they are having a knock-on effect throughout the construction sector,” he added.

And while the company has warned that these supply chain constraints are likely to remain headwinds for much of FY 2022, it “believes it is well placed, however, with its local manufacturing operations and strong track record of class-leading customer execution to navigate these challenges and respond to customer needs.”

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Reliance Worldwide Corporation Limited. The Motley Fool Australia has recommended Reliance Worldwide Corporation Limited. 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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