Richelieu Hardware Ltd (TSX: RCH) is a Canadian company that imports, manufactures, and distributes specialty hardware and related goods. The corporation operates throughout Canada as well as the eastern and midwestern parts of the United States. Home furnishing manufacturers, residential and commercial woodworkers, hardware merchants, and remodeling superstores are the primary clients of the organization.

Key Highlights

• Robust financial matrix: Despite the challenging environment, the Company maintained its pace and achieved strong results in sales, EBITDA, and net earnings. Sales and EBITDA climbed to CAD 1,440.4 million and CAD 234.4 million in FY2021, from CAD 1,127.8 million and CAD 154.5 million in FY2020, respectively. Even the net earnings increased phenomenally by 66% throughout the same period, demonstrating the company's exceptional success. The Company is working hard to maintain its winning streak and has seen increasing scale on a sequential basis, which is encouraging.

• Registering sequential growth in operating matrix: The Company maintained its pace and witnessed spirited performance across its operating margin profile in FY 2021. It is continuously working closely to carry this winning momentum and has witnessed higher scale on the sequential basis, which is appreciable.

• Started FY 2022 in a grand manner: Building on a record sales and profitability performance in 2021, the business had a great start to 2022. Its sales climbed by CAD 86.9 million, or 29.2%, to CAD 384.4 million in Q1 2022, from CAD 297.5 million in pcp, thanks to strong organic growth coupled with acquisition growth across the Canada and the U.S. This substantial sales increase was critical in boosting other crucial financial figures such as EBITDA, and net earnings.

• Higher adjusted cash flow from operating activities: The adjusted cash flow from operating activities by the company in Q1 2022 increased to CAD 42.5 million, up from CAD 30.7 million in the previous equivalent period. The rise in adjusted operational cash flows is primarily due to profitable business expansion, including profitable acquisition growth.

• Industry beating margins: The resilient business, management’s solid determination along prudent steps coupled with organic and acquisition growth in both the Canada and the U.S, helped the company in leaping the industry median margins on many fronts in Q1 2022, which is a key positive. The chart below gives a glimpse of this.

• Surfing on an acquisition wave: In addition to the five acquisitions completed in Canada and the United States during last year, three more acquisitions were completed after November 30, 2021. These eight acquisitions enabled the company to strengthen its presence in markets where it was already active, entered new strategic territories, integrate new teams with a solid knowledge of their markets, and add over CAD 180 million in sales annually. As a result of these developments and recent acquisitions, Richelieu’s North American network now consists of 106 strategically located distribution centers, including 57 in the United States.
  

Risks associated with investment

The company is subject to several risks and uncertainties which could have a material adverse effect on its future profitability and financial position. Such risks and uncertainties include, but are not limited to economic conditions, volatility in metal prices, significant competition, sources of metals supply and supply chain disruptions, labor conflict, etc.

Financial overview of Q 2022 (Expressed in 000 of CAD)

Source: Company Filing

• Strong sales: The company’s consolidated sales reached CAD 384.4 million in Q1 2022, an increase of CAD 86.9 million or 29.2% over CAD 297.7 million in pcp, of which 16.3% from internal growth and 12.9% from acquisitions.
• Higher operating expenses: In the reported period of Q1 2022, an operating expense increased to CAD 330.7 million against CAD 259.4 million in pcp. However, the operating expenses as a % to sales in the same period decreased to 86.0% against 87.2% in pcp.
• Earnings before amortization, financial costs and income taxes in the reported period, increased to CAD 53.7 million against CAD 38.1 million, partially supported by decrease in operating expenses as a % to sales and higher sales.
• Earnings before income taxes in the reported period was at CAD 41.5 million compared to CAD 28.9 million in pcp.
• Robust net earnings: in Q1 2022, the company posted elevated net earnings of 30.3 million against CAD 21.0 million, partially offset by higher income tax.

Top-10 Shareholders 

The top 10 shareholders have been highlighted in the table, which forms around 41.06% of the total shareholding. Mawer Investment Management Ltd. and Lord (Richard) hold the company's maximum interests at 12.33% and 7.55%, respectively. The company's institutional ownership stood at 45.41% and ownership of the strategic entities stood at 7.94%. Higher institutional holding boosts the confidence in the mind of retail investors. 

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics 

Stock recommendation

The company began the fiscal year 2022 with much improved earnings, showing both excellent internal growth and a significant contribution from acquisitions in the first quarter. The firm has capitalized on the opportunities created by the diverse and vibrant markets it serves, thanks to its interconnected network, continuous innovation, acquisition, and multi-access service plans. The company's financial success in the first quarter, both in Canada and the United States, is all the more pleasing because the first three months of the year are often the weakest. Nonetheless, the company showed a stronger performance, which is a huge benefit.

Furthermore, the firm has demonstrated its resiliency by strengthening its operational matrix. Even in Q1 2022, it outperformed an industry median margin on numerous fronts, demonstrating the company's competitive edge. Therefore, based on the above rationales and valuation, we recommend a "Buy" rating on the stock at the last closing price of CAD 34.60 as on May 18, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on May 18, 2022). Source: REFINITIV, Analysis by Kalkine Group 

*Recommendation is valid on May 19, 2022, price as well. 

 Technical Analysis Summary

Disclaimer

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