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).

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.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Steel &amp; Tube Holdings 1H21 Result&nbsp;— Reinforcing the Foundations

NEUTRAL
Steel &amp; Tube's (STU) 1H21 EBIT of NZ$7.6m was slightly above the top end of its guidance range supported by recent staff and site rationalisation and a strong December quarter. STU resumed distributions with a 1.2cps interim dividend largely supported by its healthy balance sheet which boasts NZ$24m of cash (15cps). While the benefits of cost out initiatives are encouraging, our optimism is tempered by the uncertain trajectory of non-residential construction activity. We remain NEUTRAL rated, but raise our target price to NZ$1.00 as we lift medium-term earnings forecasts, largely reflecting stronger-for-longer residential activity.


What's changed?&nbsp;



Earnings:&nbsp;FY21–23 EBIT +0.5%/+8.7%/10.2%
Target price:&nbsp;+9cps to NZ$1.00



Cost base reduction and property sales sees cash pile up


STU right-sized its cost base after the first lockdown, involving a significant reduction in headcount, reducing the number of sites in its network, and divesting some of its property holdings. These actions, as well as lower bad debt provisioning, resulted in EBIT ahead of last year, despite slightly lower revenues and a modest decline in gross margins. STU also benefitted from below the line one-offs, having sub-leased an old site faster than it originally expected and selling its Gisborne site above book value. Underpinning a solid operating outcome was strong cash generation, with STU's cash balance standing at NZ$24m, up from NZ$7.4m at 30 June 2020. Cash is likely to increase further over the 2H21 despite restocking inventory at higher prices with the settlement of another property sale (NZ$7m) in March.&nbsp;


Non-residential uncertainty lingers


With a greater weighting towards non-residential activity, STU's outlook is more uncertain than some of its residential focussed peers. Non-residential remains challenging with many projects being deferred or cancelled. Additionally, the pipeline remains thin in these sectors, with non-residential consents (by sqm) down -19% on a rolling 12-month basis as at December 2020. Government led infrastructure investment should provide some medium-term offset, but there will be a lag before projects commence. While anecdotes suggest the steel market is behaving more rationally than it has in recent years, rising steel prices will likely pressure margins if volumes decline and competitive intensity picks up. As such, despite STU's strong balance sheet, we remain NEUTRAL rated given medium-term demand uncertainty coupled with STU's high operating leverage.



Rohan Koreman-Smit CFA
rohan.koreman-smit@forsythbarr.co.nz
+64 9 368 0085





Ashton Olds CFA
ashton.olds@forsythbarr.co.nz
+64 9 368 0127



Steel & Tube Holdings: 1H21 Result — Reinforcing the Foundations