What’s the stock?

Reliance Worldwide Corporation supplies water flow and control products and solutions for the plumbing industry in the US, Australia, UK, Canada, and New Zealand. Its key product categories are Fittings and Pipe, Control Valves and Thermostatic products, used in behind-the-wall plumbing and hot water systems.

How long have you held the stock?

We have held the stock since May this year.

What do you like about it?

We like Reliance because of its strong business franchise and superior manufacturing / distribution capability.

Reliance has developed a very strong brand within the plumbing industry over the past 50 years in its push to connect fittings and accessories.  While there are several other manufactures of similar products, Reliance has driven category growth in both the US and Australia.  Its brand strength and first mover advantage has helped it maintain 85% category share of push to connect fittings in the USA and over 90% share in Australia.

On the manufacturing front, it has led the development of automated technologies for the production of push-to-connect fittings, with its most recent iteration of robotics representing the sixth generation of development.  This is unmatched by any of its competitors. Reliance’s distribution capability is also strong, with the company consistently exceeding its DIFOT targets. During its roll-out of product to the Lowe’s distribution network in the US, Reliance continues to achieve 100% delivery with its current largest distributor, The Home Depot.

From an investment point of view, this is a company that has increased it’s earnings almost ten fold in the past five years and will continue to grow at least 15% per annum over the next three years.  This impressive growth is underpinned almost entirely by its core push to connection product Sharkbite. Reliance is also working on a number of other adjacent products, each has the potential to dominate its category.  Trading on a Price/Earnings to Growth Ratio of 1.5 times, a substantial discount to growth companies with similar characteristics.

How is it better than its competitors?

Reliance’s key competitiveness has long been debated. For a seemingly simple product, what is the key attribute that differentiates it from the cheap imports and enable it to dominate the category across Australia and the US for so many years.  Our view is first mover advantage coupled with superior manufacturing/distribution capability. Reliance’s focus on delivering value to its customers, end users, and intermediaries holds it in good stead to continue its growth path.

What do you like about its management?

Reliance has a strong and stable management team and most key senior executives have been with the company for over 20 years.  Many have worked in various roles across the business and have intimate knowledge of the product and its market.

The CEO – Heath Sharp – has been with the company for 27 years. During the early parts of Heath’s career at Reliance, he worked in the Product Development team as a Design Engineer. Over time, he has held senior management positions in the company’s two key geographies of the US and Australia. Heath is supported by experienced senior management, including Sean McClenaghan (Head of the Americas) who has been with the company since 2014. Prior to Reliance, Sean was in the recruitment, private equity and management consulting industries. Other key senior managers include Brad Reid, CEO of Asia Pacific (a position be has held since 2007, and has been with the company for 26 years) and Bill Kluss, Chief Manufacturing Officer (who has been with the company since 1975).

What is your target price?

We regularly update our financial models to reflect the true underlying fundamental valuation of the business.  Our target price currently sits at $4.20.

At what point would you sell it?

We will be lightening our position when the stock trades closer to our target price.

How much has it added to your overall portfolio over the last 12 months?

Share price has outperformed by over 20% since our purchase in May.

Where do you see value?

We like international earners that are exposed to the upswing in economic activities across US and Europe, and sectors with cyclical earnings momentum such as mining services.

Source: ASX

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