Ann: REH - ASX Announcement Equity Raise, page-62

Hi @thunderhead1

I tried replying to your earlier post, but the reply function was not working (as seems to be frequently the case). HC really looks and feels like an amateurish site all too often. HC management really need to have a serious look at this.


Anyhow...

Apologies for the late reply. I'm not particularly enthused here, as I don't see a lot of intrinsic value in participation. So apart from whatever arbitrage value anyone may have locked in (as has been well discussed by @madamswer) - I'm not hugely enthusiastic. I'm not even all that fussed by my dilution. The way I see it, what one loses in earnings here (to dilution) one gains in debt reduction. That is, on an EBIT/EV basis, one does not come out significantly better or worse off whether one participates or not (if one includes the cost of participation in the equation - as one should).

Even on an eps basis, I don't see a huge incentive to participate - as to a substantial degree, what one loses in EBIT, one gains in NPAT, due to a reduced interest bill (assuming all proceeds are directed at debt reduction). Maybe I'm not seeing clearly, but that's the way it looks to me.

Of course, all else being equal, reduced gearing at the same value-per-share, means we have a more valuable enterprise, on a per share basis - sure. However, that value will be selflessly delivered by those that do participate - whether one chooses to participate or not.

Also, far as I can tell, REH is very unlikely to need extra liquidity to survive covid-19. So this looks like a somewhat opportunistic excuse to strengthen the balance sheet, in the face of yesteryear's adventurism. Maybe I'm being a little cynical here, but it is patently obvious that REH has been on an acquisition spree in the last few years. There's a chance this does not herald a change of company attitude. But I'm not 100% sure.

The monster-like acquisition of Morsco, in particular, means that ROCE has taken a very big hit (lots and lots of goodwill and plenty of debt). That said, they are still running well ahead of cost-of-capital, and what's more, returns-on-tangible-capital-employed are still very attractive. It is the latter (ROTCE) that is more indicative of future prospects as long as management do not continue making expensive acquisitions.

The other thing that concerns me is that USA is now as big a beast as ANZ (revenue), but is delivering less than half the earnings. That's a disproportionate amount of risk and attention. Sure, REH plan to impart their magic and turn Morsco into a thoroughbred. But this concerns me too. Morsco looks like a very different animal from Reece. Morsco seems high volume and low margin - the opposite of Reece. That doesn't make it worse, it just makes it different. It means it has a different set of competitive advantages. The Reece way of doing business is wonderful for Reece. I cannot imagine REH management thinking in terms other than a premium service & product offering. I suspect it's in their DNA. To try to improve Morsco using the same recipe, may be like trying to bake a cheescake using a chicken-soup recipe. It may be the best chicken-soup recipe in the world, but it won't make a good cheescake.

Maybe I've got it completely wrong and the transformation will work wonderfully.

So I am currently in two minds about REH. Does the future look like the 'old REH', or is the 'new REH' something else entirely?