In September, the market experienced a sectoral shift from growth to cyclical as a result of a better-than-expected vaccine development. We started accumulating Reece (ASX:REH) as this is a cyclical stock that is being supported by the government stimulus package. REH will grow even stronger when the US economy recovers.
REH is a leading supplier of plumbing, bathroom, heating, ventilation, air conditioning and refrigeration products, with operations in Australia, New Zealand and the United States. Its activities include importing, wholesaling, distribution, marketing and retailing. Reece supplies customers in the trade, retail, professional and commercial markets.
REH sales mainly come from buildings and renovations. The strong support from the Australian government will be a catalyst to REH.
HomeBuilder is a big push to build or renovate. HomeBuilder provides eligible owner-occupiers (including first home buyers) with a grant of $25,000 to build a new home or substantially renovate an existing home. This results in an increase in alterations and additions as shown in the above graph.
HomeBuilder is extended to next year under the recently announced Federal Budget 2021-22. This will continue to support the home renovation and building activities. REH, a bathroom, plumbing and kitchen products supplier, will benefit from this scheme and grow in Australia.
Strong growth pipeline in US
Despite the fact that REH has a strong foundation in Australia, REH’s US growth pipeline is our favourite part of this business. Revenue from the US is approximately even with Australia. However, REH only has 189 stores in the US, significantly lower than the number of Australian stores (currently 640). The below map shows that REH still has a lot of expansion opportunities in the US.
The expansion, however, comes with a cost. REH has a lower EBITDA margin in the US (7.6% vs 15% in Australia). This is mainly due to scale, and the cost of opening new stores and marketing. As the US division expands and the economies of scale kick in, it will be a huge bottom line boost for REH.
We continue to adopt a cautious approach in selecting growth stocks and cyclical companies. We believe REH, especially the US division, is a long-term growth story.
Till next week, happy investing.
Michael and Kenny