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

<h2>Vulcan Steel<br>On a Roll</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>Vulcan Steel (VSL) has provided another strong trading update and upgraded FY22 guidance for the third time. VSL now expects FY22 EBITDA to be NZ$236–242m and NPAT NZ$136–140m, +20% and +25% vs. prior guidance. Strong operating outcomes continue to be underpinned by high prices which more than offset 3Q volume headwinds. Whilst the near-term outlook remains positive for VSL, industry commentary suggests pricing is becoming more competitive and the recent rally in global carbon steel prices may be coming to an end. We continue to conservatively assume a moderation in carbon steel prices over FY23/24. We retain our OUTPERFORM rating reflecting VSL's (1) best in class operating characteristics, (2) high margin metals segment and margin accretive processing capabilities, (3) track record of both organic and inorganic growth, and (4) high returns and undemanding valuation metrics (FY23 P/E 11.6x, cash yield 6.2%).</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;FY22, FY23 and FY24 EBIT&nbsp;+19.7%, +3.3% and -0.4% respectively, reflecting a delayed end to current tailwinds.</li>
<li><strong>Target price</strong>:&nbsp;Increased +NZ50cps (+5%) to NZ$11.60.</li>
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<h3>Price volatility underpins better margins&nbsp;</h3>
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<p>While nine months revenue growth of +34% continues to track strongly, 3Q22 was largely supported by strong pricing. We estimate&nbsp;3Q22 volumes were -2% for the&nbsp;Steel division and -9% for Metals, reflecting the Omicron outbreak on both sides of the Tasman and flooding in Australia. This was more than offset by price, which we estimate to have been +45% for the Steel division and +32% for Metals.&nbsp;Russia and Ukraine combined export c.50m tonnes of steel or c.10% of global exports. Russia is also a large producer of Nickel and Palladium,&nbsp;key inputs into stainless and engineering steels.&nbsp;VSL's&nbsp;gross profit per tonne has clearly&nbsp;benefitted&nbsp;from this volatility,&nbsp;with strong 3Q22 outcomes in the Metals division a large contributor to the updated guidance. Price/margin benefits account&nbsp;for c.90% of the lift in FY22E EBITDA.</p>
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<h3>Margin tailwinds to ease</h3>
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<p>We expect Steel division demand to remain robust over the short to medium term given the pipeline of work consented. The Metals division should also be well supported by mining in Australia and dairy/viticulture in NZ. We have increased our FY22E NPAT forecast +21% with higher prices and margins persisting near-term. However, VSL's inventory has been repriced higher and with some moderation in global carbon steel prices we expect downward pressure on margins. We have only made minor changes to our FY23E/FY24E forecasts reflecting our expectation for margin compression in the Steel division. We forecast better outcomes in the Metals division given we expect stainless steel prices to remain more robust. Our forecasts also include benefits from the NZ$60m revenue initiatives which were outlined at the IPO.</p>
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Vulcan Steel On a Roll

OUTPERFORM
Vulcan Steel (VSL) has provided another strong trading update and upgraded FY22 guidance for the third time. VSL now expects FY22 EBITDA to be NZ$236–242m and NPAT NZ$136–140m, +20% and +25% vs. prior guidance. Strong operating outcomes continue to be underpinned by high prices which more than offset 3Q volume headwinds. Whilst the near-term outlook remains positive for VSL, industry commentary suggests pricing is becoming more competitive and the recent rally in global carbon steel prices may be coming to an end. We continue to conservatively assume a moderation in carbon steel prices over FY23/24. We retain our OUTPERFORM rating reflecting VSL's (1) best in class operating characteristics, (2) high margin metals segment and margin accretive processing capabilities, (3) track record of both organic and inorganic growth, and (4) high returns and undemanding valuation metrics (FY23 P/E 11.6x, cash yield 6.2%).


What's changed?&nbsp;



Earnings:&nbsp;FY22, FY23 and FY24 EBIT&nbsp;+19.7%, +3.3% and -0.4% respectively, reflecting a delayed end to current tailwinds.
Target price:&nbsp;Increased +NZ50cps (+5%) to NZ$11.60.



Price volatility underpins better margins&nbsp;


While nine months revenue growth of +34% continues to track strongly, 3Q22 was largely supported by strong pricing. We estimate&nbsp;3Q22 volumes were -2% for the&nbsp;Steel division and -9% for Metals, reflecting the Omicron outbreak on both sides of the Tasman and flooding in Australia. This was more than offset by price, which we estimate to have been +45% for the Steel division and +32% for Metals.&nbsp;Russia and Ukraine combined export c.50m tonnes of steel or c.10% of global exports. Russia is also a large producer of Nickel and Palladium,&nbsp;key inputs into stainless and engineering steels.&nbsp;VSL's&nbsp;gross profit per tonne has clearly&nbsp;benefitted&nbsp;from this volatility,&nbsp;with strong 3Q22 outcomes in the Metals division a large contributor to the updated guidance. Price/margin benefits account&nbsp;for c.90% of the lift in FY22E EBITDA.


Margin tailwinds to ease


We expect Steel division demand to remain robust over the short to medium term given the pipeline of work consented. The Metals division should also be well supported by mining in Australia and dairy/viticulture in NZ. We have increased our FY22E NPAT forecast +21% with higher prices and margins persisting near-term. However, VSL's inventory has been repriced higher and with some moderation in global carbon steel prices we expect downward pressure on margins. We have only made minor changes to our FY23E/FY24E forecasts reflecting our expectation for margin compression in the Steel division. We forecast better outcomes in the Metals division given we expect stainless steel prices to remain more robust. Our forecasts also include benefits from the NZ$60m revenue initiatives which were outlined at the IPO.


Vulcan Steel Limited

Vulcan Steel: On a Roll