Pressure builds for Reece

A sharp contraction in the New South Wales building industry appears to be taking hold. CSR warned of weakness in the apartment construction sector earlier this month, with Fletcher Building confirming it on Tuesday.

Fletcher Building highlighted that its Australian plumbing supplies business Tradelink was feeling the impact of lower residential consents. It's noteworthy because Tradelink competes with Reece, although Reece is the superior wholesaler by far.

Reece is probably taking market share. In October the company confirmed same-store sales growth of 6.1% in Australia and New Zealand for the first quarter of 2019. But Reece's size means it's unlikely to avoid an extended contraction in the building industry.

In the same announcement Reece reported growing sales from recently acquired US business Morsco, and provided guidance for the first half of 2019. Reece expects earnings before interest, tax, depreciation and amortisation (EBITDA) of $250-$260m for the half.

That puts the company on track to earn about 48-50 cents a share in 2019, although the contraction is still in its early days and confined to New South Wales. Fletcher Building's management noted that the contraction 'feels like a medium term trend that has some distance to run'.

At this stage we think it prudent to increase our margin of safety for Reece. We're reducing our Buy price from $10.00 to $9.00 while we adopt a watching brief. HOLD.