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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>FY21 Result&nbsp;—&nbsp;Lockdown&nbsp;Volatility in the Pipe</h2>
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<p><strong>NEUTRAL</strong></p>
<p>There were no surprises in the Steel and Tube (STU) FY21 result, with normalised earnings in line with guidance provided at the end of July. While the demand outlook remains robust, the current lockdowns provide some near-term volatility. The impact on STU could be significant given the lack of construction activity at Level 4 coupled with its high operating leverage. While we have lowered our FY22 estimates to reflect a short lockdown, our medium term expectations are largely unchanged and we expect a solid rebound once activity normalises. Additionally, STU's cost base has been reset, pricing/margin management is more disciplined, and historically high levels of cash on its balance sheet provide both near-term flexibility and potential capital management. With STU trading on a 12-month forward P/E of c.20x we view the risk/reward as balanced and retain our NEUTRAL rating.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;FY22E EBIT -11% reflecting the impact of the current&nbsp;lockdown, FY23/24E broadly unchanged</li>
<li><strong>Target price</strong>:&nbsp;-1cps to NZ$1.24</li>
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<h3>Solid result supported by both internal and external factors</h3>
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<p>STU reported a strong FY21 result, albeit largely pre-guided, with normalised EBIT of NZ$19m. There were a number of contributing factors to the robust&nbsp;result, including; (1) a strong rebound in revenue, supported by the favourable macro backdrop, (2) stable gross margins, as STU was able to pass through rising steel input prices, and (3) a significant reduction in operating costs, due to STU rationalising its network and reducing headcount last year. NPAT&nbsp;came in ahead of expectations with prior tax losses being utilised.</p>
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<h3>Cash likely to be returned to shareholders</h3>
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<p>STU continues to hold historically high levels of cash (NZ$25m or 15cps) and is working through its capital management options and suggested a special dividend or a share buyback is most likely. We view a buyback as the most likely and tax efficient due to STU having zero excess imputation credits. However, given the current lockdown management indicated any near-term decision is unlikely.</p>
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<h3>Near-term volatility</h3>
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<p>STU's&nbsp;high operating leverage compounds the significant reduction in its operations under a Level 4&nbsp;lockdown. Our revised forecasts factor in a short&nbsp;lockdown, with half of the lost sales recovered over the year&nbsp;and half of employee costs over the Level 4 period covered by the wage subsidy. We acknowledge&nbsp;the&nbsp;margin for error around these&nbsp;assumptions is high. That said,&nbsp;underlying demand is robust and&nbsp;activity is likely to bounce back quickly, we have, therefore, only made minor changes to our estimates in later years.</p>
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Steel &amp; Tube Holdings FY21 Result&nbsp;—&nbsp;Lockdown&nbsp;Volatility in the Pipe

NEUTRAL
There were no surprises in the Steel and Tube (STU) FY21 result, with normalised earnings in line with guidance provided at the end of July. While the demand outlook remains robust, the current lockdowns provide some near-term volatility. The impact on STU could be significant given the lack of construction activity at Level 4 coupled with its high operating leverage. While we have lowered our FY22 estimates to reflect a short lockdown, our medium term expectations are largely unchanged and we expect a solid rebound once activity normalises. Additionally, STU's cost base has been reset, pricing/margin management is more disciplined, and historically high levels of cash on its balance sheet provide both near-term flexibility and potential capital management. With STU trading on a 12-month forward P/E of c.20x we view the risk/reward as balanced and retain our NEUTRAL rating.


What's changed?&nbsp;



Earnings:&nbsp;FY22E EBIT -11% reflecting the impact of the current&nbsp;lockdown, FY23/24E broadly unchanged
Target price:&nbsp;-1cps to NZ$1.24



Solid result supported by both internal and external factors


STU reported a strong FY21 result, albeit largely pre-guided, with normalised EBIT of NZ$19m. There were a number of contributing factors to the robust&nbsp;result, including; (1) a strong rebound in revenue, supported by the favourable macro backdrop, (2) stable gross margins, as STU was able to pass through rising steel input prices, and (3) a significant reduction in operating costs, due to STU rationalising its network and reducing headcount last year. NPAT&nbsp;came in ahead of expectations with prior tax losses being utilised.


Cash likely to be returned to shareholders


STU continues to hold historically high levels of cash (NZ$25m or 15cps) and is working through its capital management options and suggested a special dividend or a share buyback is most likely. We view a buyback as the most likely and tax efficient due to STU having zero excess imputation credits. However, given the current lockdown management indicated any near-term decision is unlikely.


Near-term volatility


STU's&nbsp;high operating leverage compounds the significant reduction in its operations under a Level 4&nbsp;lockdown. Our revised forecasts factor in a short&nbsp;lockdown, with half of the lost sales recovered over the year&nbsp;and half of employee costs over the Level 4 period covered by the wage subsidy. We acknowledge&nbsp;the&nbsp;margin for error around these&nbsp;assumptions is high. That said,&nbsp;underlying demand is robust and&nbsp;activity is likely to bounce back quickly, we have, therefore, only made minor changes to our estimates in later years.


Steel & Tube Holdings: FY21 Result — Lockdown Volatility in the Pipe