Airlie Funds Management portfolio manager Matt Williams remembers early in his career, a quarter of a century ago, being ordered to analyze a particular ASX-listed company.
“My bosses allocated me a ‘small-cap’ company to cut my teeth on as an analyst. Read: limit any potential damage to portfolios,” he wrote on the Airlie blog.
“The trading liquidity of the company was low, and it did not get a lot of airtime among the bigger, sexier companies.”
He diligently read all the annual reports and studied the business to get “a sense for the underlying quality”.
That “pretty boring” company, with a market capitalization of $250 million at the time, was a plumbing and bathroom supplier Reece Ltd (ASX: REH).
“[It] was majority-owned by the Wilson family — a family that had no interest in spruiking the stock to pump up the share price,” he said.
“This put them at odds with 90% of other companies on the bourse, and pretty much all my experience of management teams thus far.”
Reece now has a market cap of more than $9.2 billion.
How did it multiply its valuation 37 times over without even marketing itself to investors?
The phone call with a CEO that changed a fundie forever
After watching an impressive record of profits over a couple of years, a young Williams convinced his superiors to build up a holding in Reece.
But then his heart sank.
One of Reece’s financial updates still showed strong growth in sales revenue — but net profit was significantly down.
The share price then absolutely tanked.
“I frantically looked at this profit result from Reece with a growing sense of sickness in my stomach – costs were way higher than the previous period, in my mind destroying a beautiful sales result,” said Williams.
“The ‘market’ in its short-term wisdom declared this a poor result and reacted accordingly.”
The Wilson family, who held 70% of the shares, were notoriously secretive. They rarely put out statements to the market and they certainly didn’t care about what financial analysts thought about them.
But a fired-up Williams was determined to put some questions to chief executive Alan Wilson.
After much persistence he managed to grab Wilson on the telephone.
“Wilson heard me out and further explained the strategy that was already laid out briefly in the resulting commentary,” he recalled.
“Where I saw a cost blow-out, he saw great opportunities for investment to grow – simply, rolling out the Reece store network in more locations around Australia, taking market share, and becoming ubiquitous within plumbing and bathroom.”
That phone conversation would leave a lasting impression on a young Williams.
“I hung up the call having learned a valuable lesson,” he said.
“In the cut and thrust of everyday markets, I too had absorbed the focus on the short term. The penny dropped that Wilson was investing now for future growth, and that the opportunity could be massive.”
The power of owner-managed companies
At the time of that fateful phone call 23 years ago, Reece was half the size of the dominant force in the plumbing market, Tradelink.
Since then the Wilson family’s strategy has “played out perfectly”.
“Sales in Australia/New Zealand up 8x and profits up 22x,” said Williams.
“Amazing results and all without raising any equity (until its expansion into the US in 2018) or meaningful debt. In fact, the company acquired property sites for a lot of its best-located stores along the way.”
With this growth, Reece’s market capitalization multiplied a stunning 37 times.
Meanwhile, Tradelink has been completely beaten into submission.
“Twenty-three lost years where sales went nowhere, and profits backwards – overseen by numerous management teams and a new corporate owner, Fletcher Building.”
Williams believes Reece is the perfect example of how owner-managed businesses can execute a long-term vision.
Owners who have control of the steering wheel can show patience that perhaps independent executives can’t manage in a publicly-listed environment. They can cop some short-term heat to make a long-term dream come true.
Williams describes his favoritism towards such companies as his lifelong “love affair”.
“The owner-managed model is immensely powerful in a small company, where the success factors of owner-managers can be leveraged into truly remarkable results.”