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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Vulcan Steel Limited<br>1H22 Result: Margins of Steel</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>Vulcan Steel (VSL) has reported&nbsp;a very strong debut result, with EBITDA and NPAT both roughly twice that of the prior year.&nbsp;VSL's&nbsp;strong half was driven by (1) the benefit of selling lower cost inventory as steel prices rose, and (2) the operating leverage in the business with volumes up in both the Metals and Steel segment. VSL also upgraded FY22 guidance for the second time since listing, with EBITDA and NPAT lifted +11% and +15% at the midpoint respectively. Whilst the near-term outlook remains positive for VSL, its ability to maintain gross margins over the medium term will be the real test, as recent tailwinds begin to ease. Despite medium term margin uncertainty, we continue to view VSL as attractive, given (1) its best in class operating characteristics, (2) its high margin metals segment and margin&nbsp;accretive&nbsp;processing capabilities, and (3) its track record of both organic and inorganic growth. Retain OUTPERFORM.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;FY22E, FY23E and FY24E NPAT +16%, +18% and +16% respectively.</li>
<li><strong>Target price</strong>:&nbsp;Increased +60cps to NZ$11.10, reflecting earnings&nbsp;upgrades&nbsp;partially offset by a higher cost of capital.</li>
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<h3>Material pick up in margins</h3>
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<p>VSL's&nbsp;1H22&nbsp;EBITDA&nbsp;was up&nbsp;+98%&nbsp;yoy&nbsp;to NZ$118m and NPAT +139%&nbsp;yoy&nbsp;to NZ$70m. The result was well ahead of our expectations due to better margins. Gross profit per tonne (VSL's&nbsp;key internal profitability metric) was up +32%&nbsp;yoy&nbsp;in Metals and +53%&nbsp;yoy&nbsp;in Steel. Growth in gross profit per tonne was underpinned by strong price increases, sell&nbsp;through of lower cost inventory and continued improvement of recently acquired businesses. VSL also declared an interim dividend of 27.5cps, fully imputed for NZ shareholders (but&nbsp;unfranked&nbsp;for Australian resident shareholders, in-line with the company's policy to impute interim and frank final dividends).</p>
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<h3>Positive momentum in the near term</h3>
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<p>Outlook commentary and guidance (the top end implies 2H22 EBITDA growth of -27% hoh and +18% yoy) suggests that VSL is expecting a softer second half due to (1) COVID-19 disruptions, (2) less trading days in the second half, (3) a tempering of the current strong demand environment, and (4) possible gross margin compression. We expect that demand remains robust over the short to medium term given the pipeline of work consented. However, with VSL's inventory now largely been repriced and some moderation in global steel prices we expect some downward pressure on margins. We have increased our FY22E NPAT forecast +16% on the back of the very strong 1H22 as well as higher full year margin assumptions. The slightly larger increase in our FY23E reflects further margin improvements in the metals division given stainless steel prices remain elevated. FY23E+ also benefit from the +NZ$60m revenue initiatives which were outlined at IPO.</p>
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Vulcan Steel Limited 1H22 Result: Margins of Steel

OUTPERFORM
Vulcan Steel (VSL) has reported&nbsp;a very strong debut result, with EBITDA and NPAT both roughly twice that of the prior year.&nbsp;VSL's&nbsp;strong half was driven by (1) the benefit of selling lower cost inventory as steel prices rose, and (2) the operating leverage in the business with volumes up in both the Metals and Steel segment. VSL also upgraded FY22 guidance for the second time since listing, with EBITDA and NPAT lifted +11% and +15% at the midpoint respectively. Whilst the near-term outlook remains positive for VSL, its ability to maintain gross margins over the medium term will be the real test, as recent tailwinds begin to ease. Despite medium term margin uncertainty, we continue to view VSL as attractive, given (1) its best in class operating characteristics, (2) its high margin metals segment and margin&nbsp;accretive&nbsp;processing capabilities, and (3) its track record of both organic and inorganic growth. Retain OUTPERFORM.


What's changed?&nbsp;



Earnings:&nbsp;FY22E, FY23E and FY24E NPAT +16%, +18% and +16% respectively.
Target price:&nbsp;Increased +60cps to NZ$11.10, reflecting earnings&nbsp;upgrades&nbsp;partially offset by a higher cost of capital.



Material pick up in margins


VSL's&nbsp;1H22&nbsp;EBITDA&nbsp;was up&nbsp;+98%&nbsp;yoy&nbsp;to NZ$118m and NPAT +139%&nbsp;yoy&nbsp;to NZ$70m. The result was well ahead of our expectations due to better margins. Gross profit per tonne (VSL's&nbsp;key internal profitability metric) was up +32%&nbsp;yoy&nbsp;in Metals and +53%&nbsp;yoy&nbsp;in Steel. Growth in gross profit per tonne was underpinned by strong price increases, sell&nbsp;through of lower cost inventory and continued improvement of recently acquired businesses. VSL also declared an interim dividend of 27.5cps, fully imputed for NZ shareholders (but&nbsp;unfranked&nbsp;for Australian resident shareholders, in-line with the company's policy to impute interim and frank final dividends).


Positive momentum in the near term


Outlook commentary and guidance (the top end implies 2H22 EBITDA growth of -27% hoh and +18% yoy) suggests that VSL is expecting a softer second half due to (1) COVID-19 disruptions, (2) less trading days in the second half, (3) a tempering of the current strong demand environment, and (4) possible gross margin compression. We expect that demand remains robust over the short to medium term given the pipeline of work consented. However, with VSL's inventory now largely been repriced and some moderation in global steel prices we expect some downward pressure on margins. We have increased our FY22E NPAT forecast +16% on the back of the very strong 1H22 as well as higher full year margin assumptions. The slightly larger increase in our FY23E reflects further margin improvements in the metals division given stainless steel prices remain elevated. FY23E+ also benefit from the +NZ$60m revenue initiatives which were outlined at IPO.


Vulcan Steel Limited: 1H22 Result: Margins of Steel