Cyclical stock: Reece

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.


Company Overview

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.


Australia: HomeBuilder


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.


Conclusion

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

Any information has been prepared for the purpose of providing general information only, without taking account of any particular investor's objectives., financial situation or needs, It is not an offer or invitation for subscription or purchase, or a recommendation of any financial product and it is not to be relied on by investors in making an investment decision. Past performance is not a reliable indicator of future performance. To the extent any general financial product advice is provided in this document, it is provided by Glennon Capital Pty Ltd ACN 137 219 866, AFSL No. 338 567. An investor, before acting on anything construed as advice, should consider the appropriateness of such construction and advice having regard to their objectives, financial situation or needs.