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A Broker's PreView - The Nuts & Bolts of Steel & Tube

Overview: Steel & Tube Holdings share price has been reinforced over the last week after their capture of Fortress Fasteners. The bolt on acquisition will help Steel & Tube secure their stronghold in New Zealand’s steel distribution sector. The purchase is expected to be completed within 6 weeks for $26 million in cash and $6 million in Steel & Tube shares.

Pros: The acquisition adds more diversification to Steel & Tube’s portfolio of products, and should be earnings accretive from the get go. The Company has sufficient funding to cover the acquisition without over extending itself, and will likely continue to look for other complimentary businesses.

Steel & Tube noted in their half year result that “steel demand is steadily recovering, led by construction related products.” This is positive for Steel & Tube, and a continuation of that growth will have helped the Company in the last financial year (ended June 30).

Steel & Tube will be releasing their full year result in August, which should show strong earnings and revenue growth from last year. A higher dividend is also likely, which could see the gross dividend yield rise to 9 percent on today’s share price.

Cons: Whether the construction growth and subsequent recovering demand for steel continues is a major factor for the company looking forward.

Perhaps more pressing for the Company is the faltering demand for iron ore internationally. Iron ore, steels main raw material, is off almost 50 percent in the last year on a lacklustre demand from China. This has flowed through to steel prices and will impact the value of Steel & Tubes inventories.

The lower commodity prices has coincided with a large drop in the NZD vs. the USD, which will help to counter the potential of a write down in the value of Steel & Tubes inventories.

Of course, if these lower steel costs and NZD conspire to reduce the cost of importing products, Steel & Tube may be able to reduce their expenses. This will depend on how quick Steel & Tube and the NZ steel industry in general are at passing on those reduced costs.

Price performance: The Company is trading relatively flat for the year, but is up 10 percent since the acquisition announcement.

Investment outlook: A solid result is expected, but much will depend on market forces outside their control and on the outlook provided by the company when they release their full year result in August.

*A Broker's View is written by Grant Davies, Investment Advisor at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.

 

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