New Zealand Professional Investment Services Firm

Forsyth Barr

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).

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Steel &amp; Tube Holdings Rewards of Rationalisation

NEUTRAL
Steel &amp; Tube (STU) has delivered a solid trading update for the first five months of FY21, with recent staff and site rationalisation leading to a better operating result, despite a slight decline in revenue.&nbsp;1H21 normalised EBIT guidance of NZ$6.5m–7.5m compares to 1H20 normalised EBIT of&nbsp;NZ$5.7m (a +23% improvement at the mid-point). While the benefits of cost out initiatives are encouraging, optimism is tempered by the uncertain trajectory of non-residential construction activity.&nbsp;We remain NEUTRAL rated, but raise our target price to NZ$0.91 as we lift near-term earnings forecasts.


What's changed?&nbsp;



Earnings:&nbsp;EBIT lifted +46.4%/+4.0%/+4.0% in FY21/FY22/FY23
Target price:&nbsp;Lifted +21cps to NZ$0.91



Cost base reduction flows to bottom line


STU has spent&nbsp;recent months right-sizing its cost&nbsp;base, involving a significant reduction in headcount, reducing the number of sites in its&nbsp;network, and divesting some of its property holdings. These actions have resulted in EBIT guidance ahead of last year, despite "slightly" lower revenues. STU will also benefit from below the line one-offs, having sub-leased an old site&nbsp;faster than it originally expected and selling its&nbsp;Gisborne&nbsp;site above book value. Underpinning a solid operating outcome was strong cash generation, with&nbsp;STU's&nbsp;cash balance standing at c.NZ$24m, up from NZ$7.4m at 30 June 2020. This was due to ongoing working capital discipline&nbsp;and includes proceeds from property sales.&nbsp;STU will seek further operational improvements from its ongoing digital investment.


Uncertainty lingers, but activity has surprised to date


While construction activity has been more resilient out of lockdown than most expected, the outlook remains highly uncertain, particularly in the non-residential and commercial sector, with many projects being deferred or cancelled. Additionally, the pipeline remains thin in these sectors, with non-residential consents (by sqm) down -23% on a rolling 12-month basis as at October 2020. While anecdotes suggest the steel market is behaving more rationally than it has in recent years, and STU has won some longer term contracts, we remain NEUTRAL rated given medium-term demand uncertainty coupled with STU's high operating leverage.&nbsp;



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: Rewards of Rationalisation