Reliance Worldwide reported an FY19 adjusted net profit of $152m, 1.3% below Ord Minnett’s forecast. Group operating earnings (EBITDA) of $263.2m were in line with our estimate and within the $260–270m guidance range. A fully franked final dividend of 5cps was declared, for a full-year payout of 9cps.
The Americas business achieved underlying sales growth of 8%, although EBITDA came in 7.5% short of our estimate. EBITDA for Asia Pacific and Europe beat our forecasts by 5.4% and 5.7%, respectively. The John Guest business contributed $321m to revenue and $119.3m to EBITDA, and management reiterated its target for benefits from the acquisition to exceed $30m on a run-rate basis by the end of FY20.
Gross cash conversion was 61% in FY19, including the impact from one-off costs. Adjusting for non-recurring acquisition and integration payments, this ratio picks up to 74%. We expect this metric to improve in FY20 as integration costs subside and working capital investment moderates.
Group earnings guidance for FY20 does not look overly optimistic and includes a buffer to capture any potential negative performance if trading conditions deteriorate in the event of a ‘no-deal’ Brexit.
We have lowered our EPS forecasts by an average of 8% over the FY20–22 period. Our changes reflect lower margins for the Americas as FY19 earnings fell short of our expectations. We have also reduced our European estimates to capture Brexit-related risk. We are confident, however, that Reliance’s key distribution relationships remain strong and the team’s priority is to continue driving growth above market rates in key markets.
We believe Reliance offers high-quality earnings growth, underpinned by penetration of its core push-to-connect fittings product range. The return on organic capital expenditure projects remains compelling, in our view, and it was pleasing to learn the company will continue to expand production capacity in FY20. We maintain our Accumulate recommendation, although our target price has reduced to $4.50 from $4.80 due to changes to our earnings forecasts.