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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Steel &amp; Tube Holdings<br>FY20 — Hatches Battened Down</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Steel &amp; Tube's (STU) FY20 result was pre-released earlier this month. While NZ's lockdown makes it difficult to delineate operating trends STU appears to have performed no worse than peers and, consistent with industry anecdotes, post-lockdown trading has been solid. STU has battened down the hatches in preparation for likely difficult economic conditions ahead, reducing headcount, property footprint, working capital, and debt. We see the risk/reward as balanced and lower our rating to NEUTRAL with STU's depressed share price reflecting its ​​​​​​​significant operating leverage to the uncertain environment ahead.&nbsp;</p>
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<h3>Cost base reset after 2H&nbsp;lockdown</h3>
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<p>Unsurprisingly, the lockdown significantly impacted STU's 2H20 with revenues down -18% yoy in its Distribution division and -28% in Infrastructure. This appears no worse than Fletcher Steel with volumes down -16%, and NZ Steel with long steel products -25% and flat products -16%. In line with industry anecdotes, STU highlighted better-than-expected post lockdown trading with June and July down low single digits vs. the pcp.&nbsp;</p>
<p>Given the highly uncertain outlook STU has materially restructured its cost base. Headcount and operating sites have reduced c.20% vs. pre COVID-19 levels to 830 and 25 respectively, underpinning annual cost savings of NZ$12–13m (with c.NZ$10m being realised in FY21). Strong working capital management positioned STU with NZ$7m net cash at year end.</p>
<p>Unsurprisingly, no FY21 guidance has been provided. Management highlighted likely softness in its key non-residential market with better outlooks in residential and infrastructure (supported by government stimulus, but with uncertain timing). We have lowered our FY21-23 NPAT forecasts -63%/-15%/-7% and highlight the very high margin of error in any STU earnings forecast at this point in time.</p>
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<h3>Abundant uncertainty, downgrade to NEUTRAL</h3>
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<p>We lower our rating to NEUTRAL. Despite the stock price at a &gt;25-year low we believe the risk/reward is broadly balanced given STU's substantial operating leverage to the highly uncertain outlook. While near-term trading is solid we expect demand to fade over the year as economic activity declines. Competition is negatively impacting all players across the industry and is unlikely to diminish near-term as volumes decline. Partially offsetting this, STU's 1H bad debt costs should not reoccur to the same magnitude, and its restructuring initiatives will likely deliver net cost savings. Longer-term the pendulum of competitive intensity may swing in STU's favour if the industry becomes more rational. ​​​​​​​</p>
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<div><strong>Rohan Koreman-Smit CFA</strong></div>
<div><a href="mailto:rohan.koreman-smit@forsythbarr.co.nz" target="_blank" rel="noopener">rohan.koreman-smit@<wbr>forsythbarr.co.nz</a></div>
<div>+64 9 368 0085</div>
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<div><strong>Ashton Olds</strong></div>
<div><a href="mailto:ashton.olds@forsythbarr.co.nz" target="_blank" rel="noopener">ashton.olds@forsythbarr.co.nz</a></div>
<div>+64 9 368 0127</div>
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Steel &amp; Tube Holdings FY20 — Hatches Battened Down

NEUTRAL
Steel &amp; Tube's (STU) FY20 result was pre-released earlier this month. While NZ's lockdown makes it difficult to delineate operating trends STU appears to have performed no worse than peers and, consistent with industry anecdotes, post-lockdown trading has been solid. STU has battened down the hatches in preparation for likely difficult economic conditions ahead, reducing headcount, property footprint, working capital, and debt. We see the risk/reward as balanced and lower our rating to NEUTRAL with STU's depressed share price reflecting its ​​​​​​​significant operating leverage to the uncertain environment ahead.&nbsp;


Cost base reset after 2H&nbsp;lockdown


Unsurprisingly, the lockdown significantly impacted STU's 2H20 with revenues down -18% yoy in its Distribution division and -28% in Infrastructure. This appears no worse than Fletcher Steel with volumes down -16%, and NZ Steel with long steel products -25% and flat products -16%. In line with industry anecdotes, STU highlighted better-than-expected post lockdown trading with June and July down low single digits vs. the pcp.&nbsp;
Given the highly uncertain outlook STU has materially restructured its cost base. Headcount and operating sites have reduced c.20% vs. pre COVID-19 levels to 830 and 25 respectively, underpinning annual cost savings of NZ$12–13m (with c.NZ$10m being realised in FY21). Strong working capital management positioned STU with NZ$7m net cash at year end.
Unsurprisingly, no FY21 guidance has been provided. Management highlighted likely softness in its key non-residential market with better outlooks in residential and infrastructure (supported by government stimulus, but with uncertain timing). We have lowered our FY21-23 NPAT forecasts -63%/-15%/-7% and highlight the very high margin of error in any STU earnings forecast at this point in time.


Abundant uncertainty, downgrade to NEUTRAL


We lower our rating to NEUTRAL. Despite the stock price at a &gt;25-year low we believe the risk/reward is broadly balanced given STU's substantial operating leverage to the highly uncertain outlook. While near-term trading is solid we expect demand to fade over the year as economic activity declines. Competition is negatively impacting all players across the industry and is unlikely to diminish near-term as volumes decline. Partially offsetting this, STU's 1H bad debt costs should not reoccur to the same magnitude, and its restructuring initiatives will likely deliver net cost savings. Longer-term the pendulum of competitive intensity may swing in STU's favour if the industry becomes more rational. ​​​​​​​



Rohan Koreman-Smit CFA
rohan.koreman-smit@forsythbarr.co.nz
+64 9 368 0085





Ashton Olds
ashton.olds@forsythbarr.co.nz
+64 9 368 0127



Steel & Tube Holdings: FY20 — Hatches Battened Down