At its annual general meeting, Reliance (ASX: RWC) guidance was for unchanged first-half fiscal 2026, expecting flat or slightly lower sales than the prior year. Operating earnings and margins are expected to be lower than in the first half of fiscal 2025 due to lower sales volumes and the impact of tariffs.

Why it matters: Macro uncertainty is weighing on sales, particularly in the US, contributing about 70% of operating earnings. Here, new-house sale volumes and repair and renovation activity are subdued. Additionally, as an importer of products and materials to the US, Reliance is exposed to tariffs.

  • Reliance responded quickly to tariffs. This included switching manufacturing away from China and the negotiation of price pass-throughs with retailers. Nonetheless, we expect one-off unrecoverable costs of about USD 30 million from setting up new locations and tariffs paid in fiscal 2026.
  • We estimate that about four-fifths of revenue is from the repair and renovation category, which is generally less exposed to cyclicality than new-house builds. That said, interest rates that are higher than recent history are causing customers to pull back on discretionary home improvements.

The bottom line: Our fair value estimate is unchanged at $5.70 per share for narrow-moat Reliance. Shares trade at a lofty 25% discount to our valuation, and we think the market is more pessimistic about a cyclical recovery and the cost of tariffs to the business.

  • From 2027, we expect a recovery in US housing, with likely lower interest rates to drive more spending on repairs, renovations, and new-house builds. We also assume the longer-term impact of tariffs is largely immaterial, with operations moved from China and otherwise passed through in pricing.

Between the lines: The company continues to innovate, releasing dozens of new products each year. Its designs capitalize on the trend of labor shortages in construction, creating products that can be used by less experienced tradespeople.

Tariffs and US housing weakness delay Reliance’s recovery

Reliance Worldwide produces specialist plumbing and heating products. The firm’s strategy is to expand its share of the push-to-connect fittings category. As a first mover, its SharkBite product range has about 85% market share in the US within the push-to-connect category and is the only brand sold at the two largest home retailers, Lowe’s and Home Depot. Although patents have expired for the original SharkBite and John Guest push-to-connect products, Reliance continues to innovate and has recently introduced SharkBite Max. Marketed as stronger, we think the SharkBite Max can command a price premium over the original product and other push-to-connect brands.

A secondary strategy is to leverage brand awareness and reputation, in addition to relationships with large retailers and wholesalers, to sell products complementary to the firm’s core range. New products are mostly acquired via strategic bolt-on acquisition,s including Holman (2024), EZFlo (2021), John Guest (2018), and HoldRite (2017).

Reliance has moved some of SharkBite’s manufacturing to the US from 2024. In shifting some production to the US, we think this will reduce transportation costs and improve supply in the US, which can be sporadic, with demand peaking when ice storms freeze pipes.

Its product range includes fittings, valves, pipes, water filtration systems, water and gas connectors, and other accessories. Its main brands include SharkBite, John Guest, EZ-Flo, Speedfit, Reliance Valves, and HoldRite. Its biggest geographic exposure is in North America, which accounts for about two-thirds of our forecast midcycle EBITDA, followed by the Asia-Pacific at 20%, and Europe, Middle East, and Africa, or EMEA, at around 15%.

Reliance’s sales are skewed toward the repair, maintenance, and renovation segment, which we estimate contributes about three-fourths of group revenue. The remainder of sales support residential and commercial construction and hot water system manufacturers, which use some Reliance products in the manufacturing of their products.

Bulls say

  • We estimate about three fourths of revenue are from the repair, renovation, and improvement category, which is less exposed to cyclicality in the housing market.
  • Greater adoption of Reliance’s push-to-connect fittings underpins market share gains and higher profit margins.
  • Innovative products such as EvoPex and SharkBite Max will facilitate increased penetration of push-to-connect fitting in the new construction plumbing markets, expanding underlying demand for Reliance’s products.

Bears say

  • Higher interest rates leading to a protracted downturn in housing activity in all Reliance’s operating regions could weigh on group earnings.
  • Patents on Reliance’s original push-to-connect products have expired, increasing competition through the proliferation of look-alike products.
  • Reliance has very high customer concentration, with Home Depot and Lowe’s representing most of US sales. Adverse developments in either relationship would have a material impact on sales.

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Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

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Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.