Reliance: Transferring Coverage; Fair Value Estimate Raised 33% to AUD 5.60

We raise our fair value estimate for Reliance Worldwide by 33% to AUD 5.60 per share, with the transition of coverage to a new analyst. A key driver of the upgrade is our expectation that earnings will not be as cyclical as new housing construction. We also upgrade our moat rating to Narrow, reflecting Reliance’s key push-to-connect plumbing brands having built a reputation for ease of application and reliability. We estimate about three fourths of group revenue comes from the repair, maintenance, and renovation category, which is less exposed to cyclicality in the housing market. As such, we are more constructive on near-term earnings. Although fiscal 2024 sales volumes and EBITDA margins are expected to be lower as households reduce their spending on discretionary repairs and renovations, we expect a gradual recovery in the residential sector over 2025 and 2026, supported by expected interest-rate cuts. We previously forecast a slower recovery, with a return to sales growth from fiscal 2027. Less cyclicality is also reflected in our lowered weighted average cost of capital, now 8.6% from 9.5% previously. We assume Reliance increases pricing broadly in line with inflation, with volume gains to rise with household demand for repairs and renovations. We also expect share gains in existing markets from increased usage of push-to-connect products and other specialty plumbing products.