New Zealand Professional Investment Services Firm, Forsyth Barr

Forsyth Barr

New Zealand Professional Investment Services Firm

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).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

Equity Bottom-Up

<h2>Steel &amp; Tube Holdings</h2>
FY19 Result — Margins Not Made of Steel; Upgrade to NEUTRAL
Steel &amp; Tube’s (STU) FY19 result rounds out yet another disappointing year for shareholders. EBIT came in -35% below the guidance that supported its equity raising, and the stock price is now less than half the NZ$1.90/share takeover offer rejected by the board. STU has attributed the earnings miss to external market factors. There is no doubt competition is impacting margins across the industry, but with industry players pointing fingers in different directions, it is difficult to be certain who are the chief antagonists. STU remains an inherently high risk, but with the share price at a &gt;25 year low, we view the medium-term investment proposition as balanced; upgrade to NEUTRAL.
Another challenging year
STU’s FY19 came in toward the lower end of May’s guidance. Whilst operating earnings saw a modest lift on FY18’s annus horribilis, EBIT and underlying EPS are -48% and -71% below FY17 respectively. The principal impact has been lower gross margin, down 1.5ppt yoy and 2.5ppt vs. FY17. STU is a high operating leverage business in a competitive industry; a +/-1ppt change in gross margin has a +/-NZ$5m impact on EBIT which equates to c.30% of FY19. That being said, the level in FY19 is by no means unprecedented, and is in fact +0.1ppt ahead of the 10-year median.
He said, she said
STU attributed the difficult year to “challenging” market conditions, including a decline in some sectors, notably stainless c.-20% (where demand is dominated by dairy and viticulture), and competitive pressure on price. It is difficult to confidently ascertain who is/are the principal instigator(s) of the greater competitive intensity. Some industry players point to STU’s pursuit of market share; STU rejects this notion. What is clear is that STU has not been the only company impacted. Fletcher Building’s Steel division’s FY19 EBIT was down -33%, or, we estimate, -55% excluding its steel coating business (an industry in which STU does not operate).
Inherent uncertainty
STU was, understandably in our view, reluctant to provide any guidance for FY20. The company’s leverage to volatile demand and margins is substantial, it is early in the year, and forward visibility on these factors is limited. Additionally, (1) anecdotally, competitive pressures remain considerable, and (2) demand in segments such as vertical construction and stainless appears to be easing. Furthermore, whilst STU believes it has made significant progress on its internal “Project Strive” initiatives to improve customer service and operating efficiency, tangible evidence remains limited. While all these factors mean we have little confidence in a material near-term improvement in STU’s performance, we also recognise the pendulum can swing quickly. With the market factoring in a continuation of difficult conditions, any easing in competitive intensity would likely benefit both earnings and the share price.
<div class="content-highlight">
Investment View
We upgrade to NEUTRAL. With the stock price at a &gt;25-year low we view the risk-reward as more balanced. Whilst we expect (and the market is factoring in) a continuation of difficult conditions, the pendulum can swing quickly, and STU’s sensitivity to any improved backdrop is substantial.
</div>
Matt Henry, CFA
matt.henry@forsythbarr.co.nz
+64 9 368 0115
 Matt Dunn
matt.dunn@forsythbarr.co.nz
+64 9 368 0103

Steel &amp; Tube Holdings
FY19 Result — Margins Not Made of Steel; Upgrade to NEUTRAL
Steel &amp; Tube’s (STU) FY19 result rounds out yet another disappointing year for shareholders. EBIT came in -35% below the guidance that supported its equity raising, and the stock price is now less than half the NZ$1.90/share takeover offer rejected by the board. STU has attributed the earnings miss to external market factors. There is no doubt competition is impacting margins across the industry, but with industry players pointing fingers in different directions, it is difficult to be certain who are the chief antagonists. STU remains an inherently high risk, but with the share price at a &gt;25 year low, we view the medium-term investment proposition as balanced; upgrade to NEUTRAL.
Another challenging year
STU’s FY19 came in toward the lower end of May’s guidance. Whilst operating earnings saw a modest lift on FY18’s annus horribilis, EBIT and underlying EPS are -48% and -71% below FY17 respectively. The principal impact has been lower gross margin, down 1.5ppt yoy and 2.5ppt vs. FY17. STU is a high operating leverage business in a competitive industry; a +/-1ppt change in gross margin has a +/-NZ$5m impact on EBIT which equates to c.30% of FY19. That being said, the level in FY19 is by no means unprecedented, and is in fact +0.1ppt ahead of the 10-year median.
He said, she said
STU attributed the difficult year to “challenging” market conditions, including a decline in some sectors, notably stainless c.-20% (where demand is dominated by dairy and viticulture), and competitive pressure on price. It is difficult to confidently ascertain who is/are the principal instigator(s) of the greater competitive intensity. Some industry players point to STU’s pursuit of market share; STU rejects this notion. What is clear is that STU has not been the only company impacted. Fletcher Building’s Steel division’s FY19 EBIT was down -33%, or, we estimate, -55% excluding its steel coating business (an industry in which STU does not operate).
Inherent uncertainty
STU was, understandably in our view, reluctant to provide any guidance for FY20. The company’s leverage to volatile demand and margins is substantial, it is early in the year, and forward visibility on these factors is limited. Additionally, (1) anecdotally, competitive pressures remain considerable, and (2) demand in segments such as vertical construction and stainless appears to be easing. Furthermore, whilst STU believes it has made significant progress on its internal “Project Strive” initiatives to improve customer service and operating efficiency, tangible evidence remains limited. While all these factors mean we have little confidence in a material near-term improvement in STU’s performance, we also recognise the pendulum can swing quickly. With the market factoring in a continuation of difficult conditions, any easing in competitive intensity would likely benefit both earnings and the share price.

Investment View
We upgrade to NEUTRAL. With the stock price at a &gt;25-year low we view the risk-reward as more balanced. Whilst we expect (and the market is factoring in) a continuation of difficult conditions, the pendulum can swing quickly, and STU’s sensitivity to any improved backdrop is substantial.

Matt Henry, CFA
matt.henry@forsythbarr.co.nz
+64 9 368 0115
 Matt Dunn
matt.dunn@forsythbarr.co.nz
+64 9 368 0103

Steel & Tube Holdings: FY19 Result — Margins Not Made of Steel; Upgrade to NEUTRAL

New Zealand

Steel & Tube Holdings Limited produces and distributes steel throughout New Zealand and its products include steel fasteners, nuts, bolts and screws.  The Company's other activities include steel reinforcing.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

Steel & Tube Holdings (STU NZ)

Steel & Tube Holdings: FY19 Result — Margins Not Made of Steel; Upgrade to NEUTRAL

Steel & Tube Holdings FY19 Result — Margins Not Made of Steel; Upgrade to NEUTRAL Steel & Tube’s (STU) FY19 result rounds out yet another...

Forsyth Barr

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)