Reece Australia
Recommendation
Bathroom and plumbing supplies company Reece Australia reported a good result in spite of poor consumer confidence. Thanks to lower building and renovation activity, revenues for the half-year to 31 December 2011 fell marginally to $790m. Net profit fell 3% to $58m, equating to earnings per share of 58 cents. A fully franked interim dividend of 21 cents was declared (ex date 7 Mar).
As is usual, Reece’s balance sheet was the very model of conservatism. With close to $140m in cash, zero debt, zero intangibles, and $660m of retained earnings (or undistributed profits) it’s the sort of balance sheet we seek but rarely find.
Half to 31 December | 2011 | 2010 | Change (%) |
---|---|---|---|
Revenues ($m) | 790 | 801 | (1) |
Net profit ($m) | 58 | 60 | (3) |
EPS (c) | 58.2 | 60.2 | (3) |
DPS (c) | 21.0 | 21.0 | n/a |
Franking (%) | 100 | 100 |
The company also continues to outperform bathroomware manufacturers like GWA Group and distribution competitors such as Tradelink (owned by Fletcher Building). While others in the building and renovation industry are suffering, Reece has been surprisingly resilient.
Reece is one of Australia’s highest quality businesses, although maturity and cyclical headwinds—in the form of weak housing markets—mean the company deserves less of a premium rating than before. We’d love to buy this company one day, as we indicated in Reece: Big profits from small rooms on 8 Feb 10 (Hold – $24.50).
The stock has fallen 24% since then and it’s not far from an upgrade (although we’ve also lowered the recommendation guide prices from the earlier review). If the company stumbles, we’ll be ready to pounce but, for now, the stock remains a HOLD.