Steel & Tube shares rise to two-week high as earnings beat guidance

Steel & Tube Holdings [NZX: STU] stock rose to a two-week high after it posted full-year earnings that beat guidance and lifted its dividends, as the contribution from new acquisitions and cost savings helped offset weaker prices and margins, and costs related to "quality issues". 

Underlying profit was $19.4 million in the year ended June 30, from $21.4 million a year earlier, the Wellington-based company said in a statement. Sales rose 3 percent to a record $516 million but the gain was swallowed up by selling and administration expenses and a one-off $2.7 million cost impact in the second half related to product quality issues. 

Steel & Tube's shares sank to a 15-year low in June of $1.79 in the wake of a Commerce Commission investigation into earthquake reinforcing mesh products that weren't certified as claimed, and the company was forced to cut guidance in May as intense competition in the domestic steel market squeezed margins and its Chinese-sourced road reinforcing for the Huntly bypass was found to be weaker than specified. Since then the stock has recovered and gained 4.8 percent to $2.20 today. 

A breakdown of key contributors to the 8.4 percent full-year earnings before interest and tax to $30.5 million shows that $4.2 million was made up in declines in prices of steel products and a further $2.9 million was in margin contraction. Quality issues eroded ebit by $2.7 million, costs of its Aquaduct acquisition amounted to $200,000 and depreciation and amortisation amounted to $500,000. That was offset by a $5 million contribution from Manufacturing Suppliers Ltd (MSL), acquired in August 2015 for $32 million in cash and shares, and $2.7 million in productivity and cost savings. 

The company faced the lowest steel prices in 13 years in 2016, driven by significant excess capacity in China which saw that country export 112 million tonnes of steel, with shipments expected to continue this calendar year. Prices did recover in the second half but that isn't expected to show up until 2017. 

Steel & Tube acquired the assets of the Aquaduct and Bosch Irrigation businesses for $8 million in September 2015. Aquaduct specialises in large-bore long-length polyethylene pipe and on-farm irrigation. Chief executive Dave Taylor says he sees "huge potential" in those businesses, which complement the company's existing steel pipe operations serving pumping systems in the mining, oil and gas sectors, as well as some irrigation. 

"The lens through which we look at acquisitions is about complementing what we already do, not just bulking up," he said. 

Taylor reiterated that the company has "complete confidence" in its testing of steel mesh and repeated that the industry had been subject to "significant ambiguity" in testing standards and how they were applied and interpreted. "We called on the government to act quickly and address that ambiguity and that's what the Ministry of Business, Innovation and Employment did," he said. 

In a power point presentation today, the company put the non-conformance rate for its products at just 0.25 percent of total volumes, year-on-year. It was awaiting a final ruling from the Commerce Commission on reinforcing mesh after MBIE issued new guidelines, and said issues about quality with the pile casings supplied for the Huntly bypass project had been resolved with the joint venture contractors. 

Steel & Tube's operating cash flow was $15.7 million in the second half of the latest year, the highest since the second half of 2012 and up from $13.8 million in 2015. 

"The continued execution of the company strategy through the financial year has positioned Steel & Tube well, creating strong foundations as shown by the year's performance in spite of the challenges of low global steel prices and questions around some product quality," said Taylor. "Despite the headwinds we've experienced and particularly in the second half of the year, our results demonstrate our resilience and ability to continue delivering sustainable value." 

The company remains "in a challenging global steel environment" but steel prices "are firming both domestically and globally," he said. "When coupled with a relatively robust domestic economy, we are optimistic that we'll see a stronger performance from the business in our next trading year." 

Net profit in the latest year rose about 21 percent to $25.8 million, helped by a $6.4 million gain on the sale of Steel & Tube's Bowden Road property in Auckland. 

The company will pay a final dividend of 13.5 cents on Sept. 30, up from 10 cents a year earlier, lifting total payments for the year to 22.5 cents from 19 cents. 

(BusinessDesk)