Reece Ltd (ASX: REH) has just announced the acquisition of a Southern California plumbing supply wholesaler. What does this mean for the Reece share price?
Reece was founded in 1920 when Harold Joseph Reece began selling plumbing fittings out the back of a truck. Today, the business is the Australian leader in the sale of plumbing and bathroom products. Reece employs approximately 8,000 people across all its business operations with over 800 stores in Australia, New Zealand and, more recently, the United States.
What You Need To Know Today
Reece has acquired plumbing supply wholesaler Todd Pipe & Supply, a well known business in the state of California operating out of 6 branches. These branches will be integrated into Reece’s MORSCO business which the company acquired last year.
Once complete, the acquisition of Todd Pipe & Supply will increase Reece’s existing presence in the Southern California region to 23 locations and in turn, grow its total branch network in the US to 181.
Reece has paid US$122 million for this latest acquisition, with a further US$38 million deferred until 31 December 2021 subject to achieving certain milestones.
The Todd Pipe business delivered adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of US$16.4 million in the 12 months to 31 March 2019.
Importantly, the exisiting Todd Pipe management team will join MORSCO and play a vital role in ensuring a seamless transition and the continuation of growth.
The transaction will be subject to customary closing conditions, however it is fully expected to be completed by October 1.
Commenting on the acquisition, CEO Peter Wilson said, “Todd Pipe is an example of us acting on opportunities to consolidate the fragmented plumbing market in the US Sun-Belt region. We acquired MORSCO last year to create a growth platform for the Group, and we will do this through organic, and considered in-organic opportunities as they arise.”
Are Reece Shares Now Cheap?
Today’s announcement does not do a lot to move the needle as the acquisition is a relatively small one in the context of the overall company. However, it could be seen as an important step forward in Reece’s continued expansion into the lucrative U.S market.
Investors were somewhat disappointed with Reece’s recently released full year results with shares now trading just below $10.
Trading on a price to earnings ratio of 27, Reece doesn’t look to be particularly cheap upon first glance. However, there is great opportunity for growth in the U.S which could see the share price significantly higher in the coming years.
It’s assuring to see that management own a significant portion of shares, which should in theory align them with the best interests of retail shareholders.
I will be keeping Reece on my watchlist and monitoring the progress of the U.S expansion very closely.
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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).
At the time of publishing, Luke has no financial interest in any companies mentioned.