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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Steel &amp; Tube Holdings<br>The Die is Cast for Strong 1H22</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Steel &amp; Tube (STU) has provided very strong 1H22 guidance with the company expecting EBIT up at least +91% on 1H21 and EBITDA up at least +58%. STU put the strong performance down to; (1) volume growth in target segments, (2) improved gross margin, with STU selling down cheaper inventory combined with price increases, and (3) tighter cost control. On our revised numbers STU is trading on a FY23 EV/EBIT of 10.5x and PE of 13.1x. While this is not expensive in the context of the NZ market it is in line with&nbsp;STU's&nbsp;long-run average multiples, and current volumes and steel prices are cyclically elevated. Retain NEUTRAL.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;FY22–24E EBIT +77%/+28%/+21%. The smaller changes in FY23/24E reflect a moderation in margins with low cost inventory cleared in FY22.&nbsp;</li>
<li><strong>Target price</strong>:&nbsp;+30cps to NZ$1.54.</li>
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<h3>Better price and volume</h3>
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<p>STU's revenue tracked c.14% ahead of the pcp for the first four months of 1H21 despite the two week national and five week Auckland Alert Level 4 lockdown. We estimate that STU's 1H22 revenue ran c.+25% higher than the pcp before lockdown and c.+40% higher post lockdown, likely reflecting some catch up activity. Based on price increases announced to date we estimate price has contributed c.two-thirds of revenue growth. STU has provided 1H22 guidance for EBIT of at least NZ$17m (+91%) and EBITDA at least NZ$26.5m (+58%), largely driven by strong topline growth but also supported by the recent reset of its cost base.</p>
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<h3>Cash on balance sheet likely flat despite strong result</h3>
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<p>STU had $25m cash on hand&nbsp;at FY21, and we expect it to report a similar number at its 1H22 result. Whilst 1H22 earnings will&nbsp; be&nbsp;strong, STU didn't delay or cancel inventory purchases during&nbsp;lockdown&nbsp;due to current supply chain issues and continued to pay&nbsp;staff in full. As such cash conversion will have dropped in the half, and inventory on balance sheet will have grown due to both higher prices and holding more volume. STU has delayed any capital management decision until the current uncertainty has subsided.</p>
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<h3>Meaningful earnings changes put through</h3>
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<p>We have made significant changes to our earnings estimates reflecting both price and volume growth near term but with margins moderating. Strong demand has enabled STU to lift prices in response to steel cost increases.&nbsp;Steel costs look to have moderated from recent highs, however, shipping remains an issue and management commentary suggests STU have not yet seen&nbsp;input costs moderate. We remain cognisant of the risk of a&nbsp;significant fall in steel prices.</p>
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Steel &amp; Tube Holdings The Die is Cast for Strong 1H22

NEUTRAL
Steel &amp; Tube (STU) has provided very strong 1H22 guidance with the company expecting EBIT up at least +91% on 1H21 and EBITDA up at least +58%. STU put the strong performance down to; (1) volume growth in target segments, (2) improved gross margin, with STU selling down cheaper inventory combined with price increases, and (3) tighter cost control. On our revised numbers STU is trading on a FY23 EV/EBIT of 10.5x and PE of 13.1x. While this is not expensive in the context of the NZ market it is in line with&nbsp;STU's&nbsp;long-run average multiples, and current volumes and steel prices are cyclically elevated. Retain NEUTRAL.


What's changed?&nbsp;



Earnings:&nbsp;FY22–24E EBIT +77%/+28%/+21%. The smaller changes in FY23/24E reflect a moderation in margins with low cost inventory cleared in FY22.&nbsp;
Target price:&nbsp;+30cps to NZ$1.54.



Better price and volume


STU's revenue tracked c.14% ahead of the pcp for the first four months of 1H21 despite the two week national and five week Auckland Alert Level 4 lockdown. We estimate that STU's 1H22 revenue ran c.+25% higher than the pcp before lockdown and c.+40% higher post lockdown, likely reflecting some catch up activity. Based on price increases announced to date we estimate price has contributed c.two-thirds of revenue growth. STU has provided 1H22 guidance for EBIT of at least NZ$17m (+91%) and EBITDA at least NZ$26.5m (+58%), largely driven by strong topline growth but also supported by the recent reset of its cost base.


Cash on balance sheet likely flat despite strong result


STU had $25m cash on hand&nbsp;at FY21, and we expect it to report a similar number at its 1H22 result. Whilst 1H22 earnings will&nbsp; be&nbsp;strong, STU didn't delay or cancel inventory purchases during&nbsp;lockdown&nbsp;due to current supply chain issues and continued to pay&nbsp;staff in full. As such cash conversion will have dropped in the half, and inventory on balance sheet will have grown due to both higher prices and holding more volume. STU has delayed any capital management decision until the current uncertainty has subsided.


Meaningful earnings changes put through


We have made significant changes to our earnings estimates reflecting both price and volume growth near term but with margins moderating. Strong demand has enabled STU to lift prices in response to steel cost increases.&nbsp;Steel costs look to have moderated from recent highs, however, shipping remains an issue and management commentary suggests STU have not yet seen&nbsp;input costs moderate. We remain cognisant of the risk of a&nbsp;significant fall in steel prices.


Steel & Tube Holdings: The Die Is Cast for Strong 1H22