Initial public offerings (IPOs) are suddenly hot again with the latest, WiseTech Global (WTC), debuting on the ASX last week and finishing at a 20% premium to its issue price of $3.35. The next major company to seek investor offers is plumbing manufacturer Reliance Worldwide Corporation.
And it is a sign of the crazy market we are in, when a manufacturer such as Reliance can attract such attention. With a “growth at almost any price” mentality prevailing, Reliance seems to have timed its IPO close to perfection.
Here is what we think of the IPO.
Reliance
Reliance is a leader in the design, manufacture and supply of premium branded, high quality water flow and control products and solutions for the plumbing industry. From a small manufacturing operation in Australia, Reliance has grown to become a global business, with established operations in the USA, Australia, the UK, Canada and New Zealand, and an emerging presence in Europe, following a recent investment in Spain.
Reliance’s key products and solutions are primarily used in “behind the wall” plumbing and hot water systems. These products and solutions include pipe fittings and related pipe, control valves and thermostatic products and are used for both residential and commercial applications, with a principal focus on the residential repair and renovation end-market.
Reliance’s products and solutions are sold through wholesale and retail sales channels as well as to hot water system equipment manufacturers, and are marketed under premium brands. Brands include SharkBite, Cash Acme and RMC Water Valves.
66% of Reliance’s sales come from the USA and Canada. Asia Pacific including Australia accounts for 24%, with Europe producing the remaining 10%.
Reliance manufactures about 70% of the products it sells, and has 11 highly automated manufacturing facilities across four countries. It boasts that its in-house R&D capability is a key competitive strength.
Sales by category, segment and channel
[1]Growth drivers
Reliance points to 10 years of net sales growth at a CAGR (compound annual growth rate) of 13.3%. The acceleration of sales over the last two years, together with the benefit of a weaker Australian dollar, has driven an increase in EBITDA at a CAGR of 54.2% over this shorter period.
Sales from 2006 to 2015
[2]Reliance is forecasting 2016 net sales to be 18.4% higher than 2015, and 2017 net sales to be 9.9% higher than 2016. It points to continued strong growth in the brass PTC (push to connect) plumbing fittings category in the USA, which principally serves the residential repair and renovation end market. Increasing renovation activity and spend, sales of existing homes and the ongoing ageing of plumbing systems in residential buildings should help this category grow at a CAGR of 12% in the next few years. Reliance estimates that with its SharkBite products, it has an 80% share of this category by sales volume.
It also expects increased demand for thermostatic mixing valves driven by industry and regulatory focus on safe and efficient water control products.
In new markets, Reliance sees an opportunity to service the new construction plumbing end-markets in the USA, and has recently developed a range of products, which are expected to be launched in FY17. Expansion into new geographic regions is also a growth opportunity, with continental Europe high on the agenda.
The Offer
The offer is a sell-down by the Munz family, who has owned the Reliance business since 1986. After selling between 60% and 70% of the company, they will keep 40% to 30%. Jonathan Munz, who has been involved with the company for 30 years, is the Non-Executive Chairman.
The proceeds of the offer, plus a drawdown of bank debt of approximately $160m, will be paid to the Munz family for their shares.
The shares retained by the Munz family will be subject to a voluntary escrow, which will expire in August 2017.
Details of the offer are set out below.
[3]Pricing
As the table above shows, the offer is being priced at a multiple of around 24 times FY16 NPAT and 20 times FY17 NPAT. These multiples aren’t inconsistent with some of the recent strongly performing IPOs such as Link, but they are also not cheap for an industrial company.
Still, there aren’t too many Australian companies that can point to a 10 year CAGR in sales of 13.3% or a USA market where they claim 80% market share.
Apart from net sales, key sensitivities to the forecast relate to the Australian dollar and the price of copper. Reliance doesn’t hedge and has based its forecast on an Aussie dollar of 75 US cents and a spot copper price of USD 4,700 per tonne (currently around $4,813). A 1% increase in either of these variables reduces FY17 NPAT by $0.6m and $0.3m respectively.
My view
Reliance looks like a really well-run Australian company, with an outstanding track record and very plausible growth story. While the pricing is on the high side, it is not unreasonable and with the lead managers potentially operating market stabilisation activities (which means that they can buy back shares on the market for the account of the existing owners), it will have post listing support.
However, with the Australian dollar moving higher and the company being from an industry that I don’t see as a “must have” for my portfolio, I don’t really feel a great urge to play.
The offer opens tomorrow. Brokers involved include Macquarie, JP Morgan, Evans and Partners, Morgans and Ord Minnett.
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