Richelieu Hardware Ltd. (TSX: RCH) is a Canada-based company that imports, manufactures, and distributes specialty hardware and complementary products. 

Key Updates:

• Strong demand dynamics: In Q1FY22, the company reported its consolidated salesof CAD 384.5 million, reflecting an increase of 29.2% on y-o-y basis, of which 16.3% from derived from internal growth and 12.9% from acquisitions. During the quarter, the company witnessed strong recovery within the hardware retailers and renovation segment in Canada reflecting strong consumer sentiment. Moreover, within the United States, the group reported its Sales to manufacturers of USD 110.2 million compared surged 58.8% on y-o-y basis, of which 29.3% from internal growth and 29.5% from acquisitions.
  

• Healthy Balance-sheet: In Q1FY22, the company reported its debt to equity of 0.21x, as compared to the industry median of 0.84x. This indicates that the company has a prudent capital management and better financial flexibility when compared to the industry median. Moreover, long-term debt to total capital stood higher at 9.6% in Q1FY22, as compared to the industry median of 30.7%, indicating lower balance sheet risks.

• Improved Margins: The company reported improved EBITDA margin and operating margin of 14% and 10.8%, respectively, in Q1FY22, as compared to the industry median of 13.7% and 10%, respectively. Margin improvement augurs well for better product pricing and cost efficiency and is a key positive. Additionally, the net margin was recorded at 7.9% in Q1FY22, higher than the industry median of 6.5%.

Risks associated with the investment:

The Company’s operations rely on general economic conditions and the economic aspects particularly related to the renovation and construction industry. The arrival of economic cycles could lead to a lower sale and might take a toll on the overall financial performance.   

    Q1FY22 Financial Highlights:

    Q1FY22 Income Statement Highlights (Source: Company Report)

• RCH announced its first quarterly result, wherein the company reported CAD 384.4 million, which is higher than CAD 297.5 million in pcp. The increase was driven by increased demand in the renovation market as well as higher selling prices.
• The company reported a higher operating expenses of CAD 330.7 million v/s CAD 259.4 million in pcp. Hence, earnings before amortization stood at CAD 53.7 million v/s CAD 38.1 million in pcp.
• Amortization costs and finance costs stood higher than the previous year. Earnings before income taxes stood at CAD 41.5 million v/s CAD 28.9 million in pcp, thanks to higher earnings before amortization.
• The company reported its net earnings of CAD 30.3 million v/s CAD 21 million in pcp, thanks to higher earnings before income taxes, partially offset by an increase in income tax expenses.

 Valuation Methodology (Illustrative): P/E based valuation

Analysis by Kalkine Group 

Stock Recommendation:

Despite the ongoing macro challenges, the company ended the first quarter on a positive note, which reflects strong consumer sentiment on account of improved demand dynamics. We believe this trend is likely to stay in the coming quarters, which would eventually support the company’s operations. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Global Industrial Co, H&E Equipment Services Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of RCH at the last closing price of CAD 38.45 on June 09, 2022. 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 June 09, 2022) Analysis by Kalkine Group

Note: The reference data in this report has been partly sourced from REFINITIV 

   Technical Analysis Summary

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