GWA Expanding Market Opportunity

GWA Group ((GWA)) has heightened its focus on new product development and gains in market share in the bathroom & kitchen segment. The company has identified an opportunity within this segment, which has become its core after the divestment of several other businesses.

The company is renewing its focus on secondary and end markets, rather than traditional merchant partners, and has identified a $150m revenue opportunity in the commercial and residential renovations aspect of the bathroom & kitchen segment. Collectively, this accounts for around 70% of the $1.4bn addressable market.

It has become apparent to GWA that renovations have been under penetrated. To address this, the company has expanded the number of showroom displays by 20% in the past two years.

The residential renovations market is more than three times the size of new building, but the company’s share of this is less than half its share of new building. GWA plans to capture increased share by re-branding Caroma and Clark and re-position its brands into the better quality sections of the market.

Credit Suisse believes the company is at the beginning of a virtuous cycle of reinvestment in brand and product, furthered by a new FY19-21 cost reduction target of $9-12m, 50% of which is to be reinvested in growth.

Innovations that will feature in this strategy include the Cleanflush rimless toilet range, new showrooms, products for the aged care sector – which incorporate weight-bearing grab rails into functional products, and the

Caroma Smart Command water management system.

The aged care segment represents around $170m in revenue across both commercial and residential building. The company is also exploring low capital entry into overseas high-end commercial markets to leverage its water-efficient products.

Morgans has a positive view on the strategy and believes that successful execution over time could mean its market share in the renovation segment increases to the levels achieved in the new building segment, also noting technological innovation will be a key factor going forward.

The broker is impressed by the Sydney flagship store that is soon to be opened and believes a move to increase the engagement with consumers will reap benefits.

Divestments And Dividends

No update was provided on the sale of the doors & access segment, aside from confirmation of a three-month timeline. Credit Suisse continues to model a special dividend of $0.10 per share with the potential for an additional 3-5% buyback.

Citi envisages upside risk over the medium term if the company continues to gain market share, reduces costs and divests doors & access. The divestment of this business would bring to a close almost a decade of divesting.

A sale of doors & access at book value would represent an FY18 enterprise value/EBIT multiple of 5.8x based on Citi’s forecasts and result in net debt declining such that the company could have ample room to pursue either acquisitions or capital management initiatives. The broker notes special dividends have been a feature of the capital management strategy since FY06.

Deutsche Bank suspects that, while GWA has grown is share of the renovations market at 50 basis points per annum since December 2013, each additional point of share growth will be harder to achieve at current margins. The broker believes this is particularly true for existing markets, as Caroma and Dorf are already number 1 and 4 respectively in terms of brand awareness.

Hence, the broker expects earnings from market share growth will not be able to offset lost volumes as the housing market peels back from peak levels. Amid concerns about margin erosion Deutsche Bank retains a Hold rating. Citi is less concerned, and suggests that the additional cost savings outlined could help the company maintain margins and offset a slowing housing market.

Building Outlook

New building is still expected to remain robust, driven by population growth, and the company has pointed to a strong pipeline of projects over the next few years.

While the lag between approvals and completions in new dwellings may mean volumes remain relatively robust in the second half, the company’s growth trajectory is expected to moderate as the cycle eventually softens.

Nevertheless, Citi asserts that GWA has not benefited from the material increase in apartment construction during the boom, which means it should not be materially affected when these volumes also normalise or moderate.

The company has clearly turned the corner, Wilsons believes, with a focus on leading product innovation, and is encouraged by the desire to increase exposure to the less-volatile renovation segment and positioning as a late-cycle building products supplier.

The broker also expects the impact from online competition to be minimal in the medium term because the company operates in the higher value/quality space. Wilsons, not one of the eight stockbrokers monitored daily on the FNArena database, maintains a Buy rating and $3.75 target.

The database shows one Buy (Credit Suisse) and four Hold ratings. The consensus target is $3.19, suggesting -9.3% downside to the last share price. Targets range from $2.86 (Macquarie, yet to comment on the update) to $3.40 (Credit Suisse). The dividend yield on FY18 and FY19 forecasts is 5.0%.