We raise EBIT by 11-4% for ’21-23e as we now assume less margin compression and higher organic growth in ‘21. NWG has offset pricing increases from its suppliers, and both oil and lumber prices have fallen, making further raw material input cost hikes unlikely in the near term. NWG is not experiencing raw material shortages, but we note that the construction industry as whole may see shortages. We have assumed a sequential sales downtick of 2% into Q3, which does not account for any significant impact from construction shortages industry. We expect a FY’21e EBIT margin of 10.9%, falling to 10.2% in ‘22e, as we expect the market to slow.
Compounder without a compounder’s valuation
NWG has delivered 19% EBITA CAGR ’12-’20, with 100% avg. FCF conversion and 15% avg. ROCE from operations relatively insulated from cyclical fluctuations. NWG is trading at 12x ’22e EV/EBITA, and we believe that it sustainably can deliver >10% EBITA growth with M&A. It has a cash-generative base in its bitumen-products, which supports value-accretive M&A in sustainable construction solutions.
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