Reece Group – Acquisition of MORSCO (REH)

Although I haven’t written about Reece before, the acquisition of MORSCO, announced today, prompted me to write about this amazing company, of which I have been a shareholder for the past 12 months.

Most Australians have heard of Reece Group, but most of us won’t appreciate how significant they are as a company: $5B market cap, with FY17 revenues of $2.4B and 600 stores across ANZ.  Reece are a significant company.

The Wilson Family have controlled Reece for over 50 years, and own nearly 80% of the shares.  It is Wilson owned and Wilson run, with Peter Wilson having run the business for the past decade and grown the business significantly over that period.

Today they announced a capital raise to help fund the acquisition of MORSCO, a plumbing and HVAC distributor based in Fort Worth, TX, and spread across the Southern United States, a rapidly growing region of the USA.

Reece would actually be the perfect acquisition for Berkshire Hathaway to deploy some of their excess cash – they are sizeable enough to be worth pursuing, and have extremely competent management with an ownership mindset of the business and a wide, wide moat. Maybe the expansion into America will put Reece on Warren Buffett’s radar?

While the acquisition cost of 14.4x EBITDA seems very high, I will freely admit that I know nothing about distributing toilets and air conditioners, but if it’s good enough for the Wilson family to make this acquisition, that’s all I need to know.

It goes without saying that I will be taking up the rights offer, and am excited to witness this great leap forward for a home-grown Australian icon.

FMG – Q3 Update

Fortescue recently released quarterly numbers as well as another updated presentation today from the Macquarie conference.  FMG’s share price has been getting a beatdown lately, I think largely due to the lower Q3 production, increase in C1, and low revenue realisation.

But the company continues to spew out masses of cash – $1.4B USD in HY18, and NPAT of $681M USD.  That’s around 8x earnings for a business that will continue to generate money for the next century and is currently suffering difficult operating conditions.

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There is currently a significant gap between the Platts 62 price and FMG – thanks to China’s desire to limit pollution during their winter by focusing on higher cost ores.  I would expect to see a reversion to the mean, either by a change in policy, more ore being processed in India, or new technology improving the useability of lower-grade ores.


Just in case that doesn’t happen, the new Eliwana development will improve FMG’s blended content to 60% Fe.  As I wrote in my original post, while FMG is not a perfect business, they are very cheap, and will be profitable throughout the commodity cycle.  I continue to hold my shares, average buy around $4.95.  There is room to buy more although I’ll probably build up more cash reserves waiting for better opportunities.  In the meantime I plan to sit back and continue to collect the dividends, as I watch how the landscape develops.