Richelieu Hardware Ltd 

Richelieu Hardware Ltd (TSX: RCH) is engaged in importing, manufacturing, and distributing specialty hardware and complementary products. The company offers products which are used in home and office furnishing such as storage and closet, kitchen and bathroom cabinet, door and window, residential and commercial woodworkers etc.

Key positives:

• The company reported strong cash flow from operations at CAD 38.1 million, reflecting a surge of 43.8% on y-o-y basis, driven by higher net earnings. Furthermore, the company reported improved traction from the Canada and the USA segment. Furthermore, the group recorded a 52.5% y-o-y growth from hardware retailers in the USA.
• The company has a strong capital structure and has a very negligible debt component, which ensures lower finance costs and a healthy D/E ratio.

Q3FY20 Financial Highlights: 

• RCH posted Q3FY20 sales of CAD 311.171 million, significantly higher than CAD 269.243 million in the previous corresponding period (pcp). The growth was driven by a combination of organic growth coupled with the positive impact from acquisitions.
• Earnings before income taxes stood at CAD 39.614 million versus CAD 25.404 million in the previous corresponding period (pcp). The increase was due to an improved top-line and lower finance costs, partially offset by a higher operating expense and a surge in amortization costs from the previous corresponding quarter.
• The company reported a higher net income of CAD 28.814 million, as compared to CAD 18.430 million in pcp. During the quarter, the Company also benefited from higher cyclical sales as compared to the previous corresponding period (pcp).
• Cash and cash equivalents stood higher at CAD 74.491 million compared to CAD 24.701 million as on November 30, 2019.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Strict social distancing measures might lead to a decline in the overall performance of the company as it would disrupt the distribution channel of the business.

Valuation Methodology: Price to Earnings Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of RCH gained ~38% so far this year. During the third quarter of FY20, the company acquired two new distributors of specialty hardware and is likely to be benefitted from the added clientele, and new product offerings. The company witnessed robust traction from the hardware retailers and renovation superstores which were reported at CAD 48.7 million, representing a growth of 52.7% on y-o-y basis. The group reported a solid performance as Total sales increased by 15.6%, of which 6.9% from internal growth and 8.7% from acquisitions. Third quarter sales increased by 82.3% in the hardware retailers and renovation superstores market. The Management stated that it has the capital to meet its ongoing commitments and obligations and fund its financing and investing activities for the current financial year. We have valued the stock using Price to Earnings based relative valuation method and have arrived at a double-digit downside (in percentage terms). For the said purposes, we have considered peers like CanWel Building Materials Group Ltd, Victoria PLC and Surteco Group SE etc. Considering the aforesaid facts, current price movement, we recommend a 'Watch' stance on the stock at the closing market price of CAD 37.35 on October 19, 2020.

RCH Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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