Growth Focus: Reece Ltd (REH) | Patrick Taylor

Date of Data Capture: 31/5/2019
Classification: Construction Supplies & Fixtures
Current Price: $10.38
Market Capitalisation: $5.86 B
Forecast EBITDA Growth: 38.89%
Yield Estimate: 2.15%
Consensus Price Target: $12.58
# Covering Analysts: 2
Discount at Current Price: 20.04%
Price Target Trend (3-Month): Flat +-0%
Signal Timeframe: Monthly-Weekly-Daily
TrendBias: UpDown / Long-Medium


Short-term: PositiveNeutral

Medium-term: Positive

Long-term: PositiveNeutral

Recommendation: Buy


Focus: (Dividend Income &) Capital Growth


Set up Notes:

·    With years of strong domestic performance and earnings growth, REH has pulled back recently after completing a massive acquisition that will almost double revenue and allow access to US markets, expected to significantly boost growth.

·    Consistent sales, earnings and profit gains in Australian and New Zealand operations give a solid foundation for investment, and with the US addition this trend is set to continue further, with strong growth forecasting out to 2021.

·    Reece tends to make cyclical pullbacks within its greater long-term uptrend, and we see fresh signalling here that should combine well with emerging shorter-term positive momentum.

§Support ($): 10.00, 9.75, 9.50 & 9.00.

§Resistance ($): 10.75, 11.00, 12.00 & 13.00.

Growth Focus: REECE LTD (REH)

Our primary focus here is capital gain, we will select our stocks from the ASX Top 500 All Ordinaries Index.

Having a good business pipeline is essential for a growth company – and here we think we have a sizable opportunity with Reece Ltd (REH) as the construction supplier looks ready to build on recent acquisitions and are set to tap into the US market.

For a company that is almost one hundred years old, having been listed on the ASX since 1992, Reece continues to adapt and evolve as Australia’s largest plumbing and construction supplies business. With 800 branches across Australia, New Zealand, and the United States, the company offers an attractive growth profile that belies its multi-billion dollar market cap.

Viewing Reece as a growth prospect isn’t difficult as the company already maintains a strong domestic base with solid historical organic growth and excellent underlying fundamental performance, which is supplemented with an active acquisition strategy. Last year Reece completed a number of takeovers, including Heatcraft in Australia and New Zealand, and also acquired MORSCO in the US – a company of similar size, almost doubling the scope of the combined entity.

While it takes time for any acquisition to settle in and reach full benefit, the US acquisition offers significant sales and earnings potential from a business brand already well established across some of America’s most populous states, offering large target markets. The acquisition should see cost savings and beneficial synergies as well as further potential benefits from Reece’s strong business model and innovative move towards digitisation of the product line and improved delivery performance.

Strong fundamental performance will remain a key driver and with an already robust track record of sales, earnings and profit growth since 2013, we gain confidence that forward forecasting is stronger than ever after the US addition. The small dividend is set to increase in significance in the years ahead and aggregate analyst price targets shows a large discount to current pricing with a favourable overall analyst sentiment.

Pricing shows a very long and successful history of value gains through long-running multi-year trends, interspersed with occasional consolidations providing buying opportunities into the pullbacks. We are following a well-correlated long-term signal into this entry as the stock builds a support base above $10 and looks to combine with some shorter-term strength emerging now. It may be large for a growth pick but we believe this plumbing giant will be able to handle the increased liquidity.

Source link Finance News Australia

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