New Zealand Professional Investment Services Firm, Forsyth Barr

Forsyth Barr

New Zealand Professional Investment Services Firm

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

Equity Bottom-Up

<h2>Vulcan Steel<br>1H22 Result – First impressions</h2>
<p>As expected Vulcan Steel (VSL) has reported a very strong debut result with 1H22 EBITDA (before significant items) and NPAT doubling to NZ$118.0m and NZ$53.8m respectively. The result was well ahead of our forecast and consensus largely driven by stronger margins&nbsp;-&nbsp;Steel division average price/t was up 29% and gross profit $/t lifted 53%, price growth was more modest in the Metals division but was still +13.5% which drove a +32% increase in gross profit $/t. The interim dividend was also ahead of our forecast (27.5cps vs ForBarr 24cps) and is fully imputed for NZ shareholders.</p>
<p>VSL lifted its FY22 EBITDA and NPAT guidance to +11% and +15% to $194-204m and $107-114m (ForBarr current $182m and $99m respectively). VSL stated that (1) ANZ demand is expected to remain strong but with some short term disruptions from Omicron and (2) while global steel prices and shipping costs have eased slightly from recent peaks there is uncertainty over 2022 production levels and weaker A$ and NZ$ should support prices of imported materials. We are OUTPERFORM rated.</p>
<p>Key features of the result:</p>
<ul>
<li><strong>Steel</strong> – Gross profit per tonne +53% YoY, on revenue +42% YoY. Volumes +10%, price + 29%. EBITDA +120%.</li>
<li><strong>Metals</strong> – Gross profit per tonne +32% YoY, on revenue +22% YoY. Volumes +8%, price +14%. EBITDA +84%.</li>
<li><strong>Cost inflation</strong> – VSL’s opex increased +8% YoY, and commentary suggests that a portion of this was driven by staff cost inflation (+13% increase in Employee Benefits on +0% change in staff numbers).</li>
<li><strong>Operating cash flow</strong> – Declined -45% on 1H21, as a strong increase in cash flow from earnings was offset by an increase in working capital investment (inventory +38% or NZ$63m).</li>
<li><strong>Revenue initiatives</strong> – At IPO, VSL indicated it had identified a number of initiatives to increase revenue run-rate by +NZ$60m over 36 months. The company expects these to start delivering benefits in FY23.</li>
</ul>
<p>Investor briefing at 11:00am NZT / 9:00am AEDT</p>
<p>Conference call – register here:&nbsp;<a href="https://s1.c-conf.com/diamondpass/10018918-r0qa9p.html" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://s1.c-conf.com/diamondpass/10018918-r0qa9p.html&amp;source=gmail&amp;ust=1644541042619000&amp;usg=AOvVaw27Ho-zJ2NGQs_QSeYjKYGv" rel="noopener">https://s1.c-conf.com/<wbr>diamondpass/10018918-r0qa9p.<wbr>html</a></p>
<p>Webcast:&nbsp;<a href="https://webcast.openbriefing.com/8349/" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://webcast.openbriefing.com/8349/&amp;source=gmail&amp;ust=1644541042619000&amp;usg=AOvVaw00JrNyT_4i75eTWB63ZcmW" rel="noopener">https://webcast.openbriefing.<wbr>com/8349/</a>&nbsp;&nbsp;</p>
<p>1H22 result summary</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/256/200/original/image_97494729941644456760882.png?1644456768" class="editor-image img-responsive" data-smartkarma-image-id="256200"></figure>
<p>Source: Forsyth Barr analysis, Company reports</p>

Vulcan Steel 1H22 Result – First impressions
As expected Vulcan Steel (VSL) has reported a very strong debut result with 1H22 EBITDA (before significant items) and NPAT doubling to NZ$118.0m and NZ$53.8m respectively. The result was well ahead of our forecast and consensus largely driven by stronger margins&nbsp;-&nbsp;Steel division average price/t was up 29% and gross profit $/t lifted 53%, price growth was more modest in the Metals division but was still +13.5% which drove a +32% increase in gross profit $/t. The interim dividend was also ahead of our forecast (27.5cps vs ForBarr 24cps) and is fully imputed for NZ shareholders.
VSL lifted its FY22 EBITDA and NPAT guidance to +11% and +15% to $194-204m and $107-114m (ForBarr current $182m and $99m respectively). VSL stated that (1) ANZ demand is expected to remain strong but with some short term disruptions from Omicron and (2) while global steel prices and shipping costs have eased slightly from recent peaks there is uncertainty over 2022 production levels and weaker A$ and NZ$ should support prices of imported materials. We are OUTPERFORM rated.
Key features of the result:

Steel – Gross profit per tonne +53% YoY, on revenue +42% YoY. Volumes +10%, price + 29%. EBITDA +120%.
Metals – Gross profit per tonne +32% YoY, on revenue +22% YoY. Volumes +8%, price +14%. EBITDA +84%.
Cost inflation – VSL’s opex increased +8% YoY, and commentary suggests that a portion of this was driven by staff cost inflation (+13% increase in Employee Benefits on +0% change in staff numbers).
Operating cash flow – Declined -45% on 1H21, as a strong increase in cash flow from earnings was offset by an increase in working capital investment (inventory +38% or NZ$63m).
Revenue initiatives – At IPO, VSL indicated it had identified a number of initiatives to increase revenue run-rate by +NZ$60m over 36 months. The company expects these to start delivering benefits in FY23.

Investor briefing at 11:00am NZT / 9:00am AEDT
Conference call – register here:&nbsp;https://s1.c-conf.com/diamondpass/10018918-r0qa9p.html
Webcast:&nbsp;https://webcast.openbriefing.com/8349/&nbsp;&nbsp;
1H22 result summary

Source: Forsyth Barr analysis, Company reports

Vulcan Steel (VSL.NZ): 1H22 Result – Very Strong

<h2>Vulcan Steel Limited<br>Steel Going Strong</h2>
<div></div>
<p><strong>OUTPERFORM</strong></p>
<div>
<p>Vulcan Steel (VSL) is a pure play steel distributor operating across&nbsp;New Zealand and Australia. While VSL has been a strong performer since listing we believe the risk/reward remains positive and initiate coverage with an NZ$10.50 target price and an OUTPERFORM rating. While cyclical operating conditions are clearly buoyant, we believe VSL is well placed to outperform peers medium term given its high service levels, value add processing, favorable customer mix, propriety inventory management system, market positioning, and strong corporate culture. Our FY22E estimates are at the top end of&nbsp;VSL's&nbsp;guidance while our FY23E numbers sit +9% vs. consensus. Despite achieving margin and return metrics well above industry average, VSL is currently trading on a 12&nbsp;month forward&nbsp;EV/EBIT of 10x and P/E of 12x, broadly in line with the global steel peer group but a discount to high performing Australasian distributors and ANZ building materials peers.&nbsp;</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/247/333/original/image_53077390921639454317146.png?1639454319" class="editor-image img-responsive" data-smartkarma-image-id="247333"></figure>
</div>
<div>
<h3>Best in class distributor</h3>
</div>
<div>
<p>VSL provides customer value by (1) its strong service level, with delivery in full on time (DIFOT) of 98% in FY21, (2) its range of processing capabilities, and (3) its broad selection&nbsp;of products (c.12.0k and c.7.5k&nbsp;SKUs&nbsp;in Australia and New Zealand respectively). VSL adds shareholder value through&nbsp;its industry leading margins and returns, its ability to acquire and improve&nbsp;businesses, and its ability to effectively enter new markets and geographies.&nbsp;</p>
</div>
<div>
<h3>A range of growth options and more stable margins</h3>
</div>
<div>
<p>VSL has a strong track record of growth through both acquisition and organic share gains. Its recent trading update highlighted clear&nbsp;outperformance&nbsp;vs. peers. With low market share in Australia (c.2%) we see a solid runway for growth both organically and via bolt-on acquisitions. VSL has also identified NZ$60m of additional revenue (c.NZ$20m gross profit) opportunities that are not reliant on market growth. These are expected to contribute from 2H23. In addition, we expect more stable through the cycle margins than peers, with VSL&nbsp;focussing&nbsp;on maintaining or growing gross profit $ per tonne. While declining steel prices are a headwind to achieving this aim,&nbsp;value add processing, favorable customer mix, market positioning, strong corporate culture, and a propriety inventory management system give us comfort in VSL achieving&nbsp;better outcomes than peers.</p>
</div>
<div>
<h3>Forecasting top end of guidance for FY22E and above consensus for FY23E</h3>
</div>
<div>
<p>We forecast FY22 EBITDA/NPAT of NZ$182/99m, which is towards the top end of&nbsp;VSL's&nbsp;revised guidance. Given the strong operating backdrop and&nbsp;VSL's&nbsp;conservative management we see upside risk to these forecasts. While our FY22E estimates are broadly in line with consensus,&nbsp;our FY23E&nbsp;estimates are +9% higher, reflecting&nbsp;further share gains and internal initiatives offsetting margin headwinds from steel price declines.</p>
</div>

Vulcan Steel Limited Steel Going Strong

OUTPERFORM

Vulcan Steel (VSL) is a pure play steel distributor operating across&nbsp;New Zealand and Australia. While VSL has been a strong performer since listing we believe the risk/reward remains positive and initiate coverage with an NZ$10.50 target price and an OUTPERFORM rating. While cyclical operating conditions are clearly buoyant, we believe VSL is well placed to outperform peers medium term given its high service levels, value add processing, favorable customer mix, propriety inventory management system, market positioning, and strong corporate culture. Our FY22E estimates are at the top end of&nbsp;VSL's&nbsp;guidance while our FY23E numbers sit +9% vs. consensus. Despite achieving margin and return metrics well above industry average, VSL is currently trading on a 12&nbsp;month forward&nbsp;EV/EBIT of 10x and P/E of 12x, broadly in line with the global steel peer group but a discount to high performing Australasian distributors and ANZ building materials peers.&nbsp;



Best in class distributor


VSL provides customer value by (1) its strong service level, with delivery in full on time (DIFOT) of 98% in FY21, (2) its range of processing capabilities, and (3) its broad selection&nbsp;of products (c.12.0k and c.7.5k&nbsp;SKUs&nbsp;in Australia and New Zealand respectively). VSL adds shareholder value through&nbsp;its industry leading margins and returns, its ability to acquire and improve&nbsp;businesses, and its ability to effectively enter new markets and geographies.&nbsp;


A range of growth options and more stable margins


VSL has a strong track record of growth through both acquisition and organic share gains. Its recent trading update highlighted clear&nbsp;outperformance&nbsp;vs. peers. With low market share in Australia (c.2%) we see a solid runway for growth both organically and via bolt-on acquisitions. VSL has also identified NZ$60m of additional revenue (c.NZ$20m gross profit) opportunities that are not reliant on market growth. These are expected to contribute from 2H23. In addition, we expect more stable through the cycle margins than peers, with VSL&nbsp;focussing&nbsp;on maintaining or growing gross profit $ per tonne. While declining steel prices are a headwind to achieving this aim,&nbsp;value add processing, favorable customer mix, market positioning, strong corporate culture, and a propriety inventory management system give us comfort in VSL achieving&nbsp;better outcomes than peers.


Forecasting top end of guidance for FY22E and above consensus for FY23E


We forecast FY22 EBITDA/NPAT of NZ$182/99m, which is towards the top end of&nbsp;VSL's&nbsp;revised guidance. Given the strong operating backdrop and&nbsp;VSL's&nbsp;conservative management we see upside risk to these forecasts. While our FY22E estimates are broadly in line with consensus,&nbsp;our FY23E&nbsp;estimates are +9% higher, reflecting&nbsp;further share gains and internal initiatives offsetting margin headwinds from steel price declines.


New Zealand

Vulcan Steel Ltd operates as a metals distributing and processing company. The Company offers stainless and engineering steel products. Vulcan Steel serves customers in Australia and New Zealand.

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Vulcan Steel Limited (VSL NZ)

Vulcan Steel (VSL.NZ): 1H22 Result – Very Strong

Vulcan Steel1H22 Result – First impressions As expected Vulcan Steel (VSL) has reported a very strong debut result with 1H22 EBITDA (before...

Forsyth Barr

Vulcan Steel Limited: Steel Going Strong

Vulcan Steel LimitedSteel Going Strong OUTPERFORM Vulcan Steel (VSL) is a pure play steel distributor operating across New Zealand and Australia....

Forsyth Barr

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