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

<h2>Steel &amp; Tube Holdings<br>1H22 Result&nbsp;— Purple Patch Continues</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Steel and Tube's (STU) 1H22 result topped guidance provided at mid-December, highlighting the strong demand environment. STU&nbsp;benefitted&nbsp;from both higher volumes and improved gross margins with the latter supported by sell down of lower cost historical inventory in a rising price environment. As such there will likely be some margin unwind in 2H22 given (1)&nbsp;STU's&nbsp;inventory balance which is up +25% from cost increases alone, and (2) international steel prices have moderated slightly from recent peaks. We lift our estimates, reflecting continuation of strong construction activity and some underlying mix/pricing benefits to margin but still expect a moderation in earnings in FY23 as margin tailwinds fade. Retain NEUTRAL.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;Our FY22 forecast is unchanged, with Omicron disruption offsetting better margins. Our FY23/24 EBIT is +7% with slightly stronger top line and gross margin assumptions.</li>
<li><strong>Target price</strong>:&nbsp;+10cps to NZ$1.85</li>
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<h3>Strong start to the year</h3>
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<p>STU had a very strong end to 1H22 with the result coming in ahead of guidance provided mid-December. 1H22 was underpinned by (1) a strong rebound in activity post the Delta lockdown with revenue +25% and volumes +13% on the prior period, and (2) gross margins +260bps driven by price increases and sell down of lower cost inventory (average sale price per tonne was +11% while cost of goods sold was +7%). Robust activity has continued with January revenue +30% on the prior period.</p>
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<h3>Cash down due to inventory build</h3>
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<p>STU ended 1H22 with an NZ$1.2m net cash position, down from NZ$25m largely due to increased inventory investment driven by (1) increased cost of steel, and (2) global supply chain congestion increasing shipping times for product. STU management indicated it made a concerted effort to maintain stock levels, especially in key categories to ensure STU can supply customers.</p>
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<h3>Outlook robust</h3>
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<p>While no FY22 guidance was provided, STU expects a positive medium term market backdrop with a strong for longer cycle supported by residential demand, improving commercial and infrastructure investment (a similar outlook as Fletcher Building), and an expanding manufacturing sector. STU indicated it&nbsp;expects supply chain issues to persist for at least this financial year.​​​​​​​&nbsp;Longer term, STU has identified a number of growth opportunities both within existing product lines and&nbsp;adjacencies, with an aim to increase market share and gross margins. The key upside risk to our forecasts is an extended period of strong steel prices and robust margins.</p>
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Steel &amp; Tube Holdings 1H22 Result&nbsp;— Purple Patch Continues

NEUTRAL
Steel and Tube's (STU) 1H22 result topped guidance provided at mid-December, highlighting the strong demand environment. STU&nbsp;benefitted&nbsp;from both higher volumes and improved gross margins with the latter supported by sell down of lower cost historical inventory in a rising price environment. As such there will likely be some margin unwind in 2H22 given (1)&nbsp;STU's&nbsp;inventory balance which is up +25% from cost increases alone, and (2) international steel prices have moderated slightly from recent peaks. We lift our estimates, reflecting continuation of strong construction activity and some underlying mix/pricing benefits to margin but still expect a moderation in earnings in FY23 as margin tailwinds fade. Retain NEUTRAL.


What's changed?&nbsp;



Earnings:&nbsp;Our FY22 forecast is unchanged, with Omicron disruption offsetting better margins. Our FY23/24 EBIT is +7% with slightly stronger top line and gross margin assumptions.
Target price:&nbsp;+10cps to NZ$1.85



Strong start to the year


STU had a very strong end to 1H22 with the result coming in ahead of guidance provided mid-December. 1H22 was underpinned by (1) a strong rebound in activity post the Delta lockdown with revenue +25% and volumes +13% on the prior period, and (2) gross margins +260bps driven by price increases and sell down of lower cost inventory (average sale price per tonne was +11% while cost of goods sold was +7%). Robust activity has continued with January revenue +30% on the prior period.


Cash down due to inventory build


STU ended 1H22 with an NZ$1.2m net cash position, down from NZ$25m largely due to increased inventory investment driven by (1) increased cost of steel, and (2) global supply chain congestion increasing shipping times for product. STU management indicated it made a concerted effort to maintain stock levels, especially in key categories to ensure STU can supply customers.


Outlook robust


While no FY22 guidance was provided, STU expects a positive medium term market backdrop with a strong for longer cycle supported by residential demand, improving commercial and infrastructure investment (a similar outlook as Fletcher Building), and an expanding manufacturing sector. STU indicated it&nbsp;expects supply chain issues to persist for at least this financial year.​​​​​​​&nbsp;Longer term, STU has identified a number of growth opportunities both within existing product lines and&nbsp;adjacencies, with an aim to increase market share and gross margins. The key upside risk to our forecasts is an extended period of strong steel prices and robust margins.


Steel & Tube Holdings: 1H22 Result — Purple Patch Continues