Brokers review the impact of new product launches in the
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-Manufacturing changes also aim to simplify the supply chain
-The upside opportunity from entering the PEX-a pipe market
-Uncertain economic conditions continue to weigh
The launch of two new products in the
While the company's shares have rallied 20% so far this year to around
The release of new products is consistent with management's strategy to increase its share of the plumbing segment through its superior brands, expanding its product range and leveraging its existing distribution network, notes
Macquarie now expects a shelf price increase for the enhanced SharkBite product, referred to as SharkBite Max (push-to-connect fittings), and expects greater organic growth potential via the addition of expansion-based fittings (PEX-a pipe) to the product line-up.
These announcements also boost Reliance's innovation credentials, suggests the broker, and both products will benefit from, and strengthen, key channel partner relationships.
In addition, the analyst anticipates extra opportunities should evolve in the new residential construction market, as management plans to use its new expansion fitting capability as a front for broader growth.
A simplified supply chain out of
At the company's investor day, management announced the closure of the Croydon manufacturing plant in
A rejigging of the manufacturing process will reduce transport costs, provide working capital efficiencies and improve the company's responsiveness to demand, according to
While Macquarie raises its target to
SharkBite
To the untrained eye photos of SharkBite Max look similar to its predecessor, but
This new product, along with PEX-a pipe, makes sound strategic sense and position the business to continue to drive growth, suggests
Jarden forecasts SharkBite Max could add around
While SharkBite Max will sell at a higher price, Ord Minnett suggests the product only adds a "stay-in-the-game" element and prefers to focus on upside from PEX-a pipe.
The PEX-a pipe opportunity
This PEX-a pipe market offers new product development and the potential to win additional shelf space and market share through existing partners, believes
PEX-a is the fastest growing pipe and fitting system, taking share from chlorinated PVC (which can withstand higher temperatures) and copper, explains Macquarie.
This broker feels Reliance's entry into this market will be a key attraction for the company's Big Box retail partners.
The product category has a wide end-market exposure to new multi-family, new residential and the restoration and renovation (R&R) segments. Macquarie expects the category will increase wallet share with professional plumbers.
The PEX-a pipe space represents around 38% of the US pipe market by volume, points out Jarden.
Assuming a 15-20% return on invested capital, this broker suggests PEX-a could represent circa
There is also a relatively low capital cost (around
Management believes that there will be little cannibalisation with the existing PEX-b offering. As a result, any success in this market is expected to boost group earnings.
Reliance intends to initially focus on the under-served retail market with plans to service 90% of Lowes, the second-largest hardware chain in the US. The company will focus on the wholesale market at a later date.
Outlook
Lower near-term levels of construction activity in Reliance's three key geographies are likely to result in lower volumes, cautions
Moreover, uncertain economic conditions, including rising interest rates and falling house prices have the broker adopting both a cautious outlook and Hold rating.
There are six brokers that cover
Outside daily coverage, the average target price of Jarden (Neutral) and Buy-rated
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