STU - Steel & Tube Holdings

[LoungeLizard]

'Excellent result' v 'poor one' ...c'mon mate

V pcp-

STU sales down 17% v Vulcan down 12%
STU ebitda down 31% v Vulcan down 30%
STU npat down 55% v Vulcan down 52%

If Vulcan had 'poor result' than STU had a 'poor result' as well I reckon

But Mark does a good rave eh so all hunky dory

Muted market response so far ......but that person waiting in the wings will see share price close at 115 or higher

Fair enough. But as an investor - assuming you are actually at the races  - which horse would you rather back at this point? A company with no debt and maintaining dividends or a company with a mountain of debt and cut its dividend by 50% from last year? My instinct tells me that STU will out-perform Vulcan over the next period. Time will tell.

[winner (n)]

Good news Peter .....it seems that the forthcoming Super Cycle is going to be even bigger than we envisaged ...billions more

https://www.nzherald.co.nz/business/transport-projects-could-cost-twice-as-much-as-national-estimated-nzta/DOYAPIZECNFYPBWYP6Z6J66XEM/?lid=11adb78pqwe1

[BlackPeter]

Good news Peter .....it seems that the forthcoming Super Cycle is going to be even bigger than we envisaged ...billions more

https://www.nzherald.co.nz/business/transport-projects-could-cost-twice-as-much-as-national-estimated-nzta/DOYAPIZECNFYPBWYP6Z6J66XEM/?lid=11adb78pqwe1

Hmm - the art of understating project costs does not seem to be restricted to one particular political colour - no matter whether left or right, they all seem to master the art of overspending and underdelivering.

So difficult to choose ;

But yes, this political mastergame will be good for suppliers (though less for the taxpayers - ouch, this is us) with the exception of FBU (but this is a different thread). FBU tends to do bad in bad times and particularly bad in good times, but yes - STU (and others) might thrive.

[winner (n)]

Over the last few years Mark has raved about how good their Gross Margin is and how it's improving (in rave language sky rocketing)

I have a lot of trouble reconciling Mark's raves with the financials ...and gross margin % is one if them

I wouldn't call this trend great

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[BlackPeter]

Over the last few years Mark has raved about how good their Gross Margin is and how it's improving (in rave language sky rocketing)

I have a lot of trouble reconciling Mark's raves with the financials ...and gross margin % is one if them

I wouldn't call this trend great

You cannot view this attachment.

You clearly choose the wrong time window ; - If you start in June 20 and do a linear extrapolation you get a nice and solid improvement trend. Sure - not sky rocketing (unless the sky is falling), but no doubt getting better.

Admittedly - if you take the Covid years out, than it looks pretty much like a flatline. Not sure whether this is good or bad.

[winner (n)]

You clearly choose the wrong time window ; - If you start in June 20 and do a linear extrapolation you get a nice and solid improvement trend. Sure - not sky rocketing (unless the sky is falling), but no doubt getting better.

Admittedly - if you take the Covid years out, than it looks pretty much like a flatline. Not sure whether this is good or bad.

Real point is that Mark's raves aren't really supported by financials.

I see there's a similar chart in the STU preso ...trouble is their chart is wrong .....maybe aimed at supporting his rave

Quite a few other things over the years don't 'add up' ......to the point I take Mark's rave with a grain of salt........even his and Susan's optimism about the future.

Never mind, this is only how I see it now .....as long as you and others see things differently hopefully you'll be OK

[winner (n)]

Marks always raving on about how M&A is driving growth but is always vague about the numbers

I like this graphic from full year preso

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Pretty amazing growth eh ...but come half year little comment about Kiwi Pipes

All one can conclude is that 'real' / 'base' sales have declined by a lot more than the reported 17% ......... 'base' could say down 25% softened by M&A growth

Mark's raving does go over board at time ....like a true salesman only the good stuff and then embellish that ......quite amusing seeing punters fall for it

[Ferg]

Over the last few years Mark has raved about how good their Gross Margin is and how it's improving (in rave language sky rocketing)

I have a lot of trouble reconciling Mark's raves with the financials ...and gross margin % is one if them

I wouldn't call this trend great

You cannot view this attachment.

Thanks for that.  Is 20-22% GM really that good? {rhetorical}  It doesn't leave much room for CODB.

A client I work with has a GM of 35-40% on products where steel makes up 70% of the cost of materials.  GM is after deducting material costs, labour, freight, rebates, duties, packaging & other production costs etc.  So it's a real figure.  The point being low 20's is hardly something to brag about.

At 20% GM, extra overhead costs of $100k requires an additional $500k in sales to break even.  Whereas at 40% GM, extra overheads costs of $100k requires an additional $250k in sales to break even.  Looking at this another way, every 2% in discounts requires an additional 10% in volumes at no discount to make up the lost GM dollars, when GM is 20%.  For the 40% business this is 5%.

At the risk of stating the obvious, business is so much easier with large margins.  Whilst 20% is better than 10%, IMO 20% is relatively tight and Management really need to be onto cost control.

[Perky]

Good analysis there Ferg.

I have a small holding of Stu...hold more for dividend yield rather than growth.

At some stage I want to pick up some  VUlcan steel...I think their gross margin 35-40% so similar to your client

Much more efficient business and dual aus/nz market for better growth when market picks up.

I thought the vul price might drop a bit after last report but didn't really so I just wait my time holding Stu but VUl is on my watching list. Was hoping might get down to low $7 or late $6 for a buyzone.
Maybe I'm dreaming but it still seems a little expensive for me

[winner (n)]

Thanks for that.  Is 20-22% GM really that good? {rhetorical}  It doesn't leave much room for CODB.

A client I work with has a GM of 35-40% on products where steel makes up 70% of the cost of materials.  GM is after deducting material costs, labour, freight, rebates, duties, packaging & other production costs etc.  So it's a real figure.  The point being low 20's is hardly something to brag about.

At 20% GM, extra overhead costs of $100k requires an additional $500k in sales to break even.  Whereas at 40% GM, extra overheads costs of $100k requires an additional $250k in sales to break even.  Looking at this another way, every 2% in discounts requires an additional 10% in volumes at no discount to make up the lost GM dollars, when GM is 20%.  For the 40% business this is 5%.

At the risk of stating the obvious, business is so much easier with large margins.  Whilst 20% is better than 10%, IMO 20% is relatively tight and Management really need to be onto cost control.

Good insights Ferg

STU point out they calculate GM different from others but the loose definitions they give seem much the same as you outline.

While STU margins are in low 20's Vulcan Steel are in the high 30's.

Whether it's a different methodology maybe a better performance indicator to look at is EBIT margin. I spent decades working in manufacturing and distribution companies servicing the construction / building / DIY markets. The benchmark most in the sector strived for was an EBIT  margin of 15%

I pulled out these numbers comparing STU and Vulcan ....quite interesting and your comments are very pertinent

You can see STU margin low at the GM line but pretty thin at the EBIT line ...and significantly less than Vulcans. Note EBIT adjusted to incluse lease costs

I look forward to seeing how they pan out but STU doesn't seem too have much to play with if the top line shrinks much more.

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[BlackPeter]

Good insights Ferg

STU point out they calculate GM different from others but the loose definitions they give seem much the same as you outline.

While STU margins are in low 20's Vulcan Steel are in the high 30's.

Whether it's a different methodology maybe a better performance indicator to look at is EBIT margin. I spent decades working in manufacturing and distribution companies servicing the construction / building / DIY markets. The benchmark most in the sector strived for was an EBIT  margin of 15%

I pulled out these numbers comparing STU and Vulcan ....quite interesting and your comments are very pertinent

You can see STU margin low at the GM line but pretty thin at the EBIT line ...and significantly less than Vulcans. Note EBIT adjusted to incluse lease costs

I look forward to seeing how they pan out but STU doesn't seem too have much to play with if the top line shrinks much more.

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I am sure you considered for your comparison that STU is practically without bank debts (liabilities to assets 42,8%), while VSL is fully loaded, so to speak (liabilities to assets 81.5% - maybe they have aspirations to turn into a bank and have already the necessary debts :p ;

VSL better have a higher EBIT margin to pay for all these nasty interests STU does not need to worry about.

[winner (n)]

I am sure you considered for your comparison that STU is practically without bank debts (liabilities to assets 42,8%), while VSL is fully loaded, so to speak (liabilities to assets 81.5% - maybe they have aspirations to turn into a bank and have already the necessary debts :p ;

VSL better have a higher EBIT margin to pay for all these nasty interests STU does not need to worry about.

I am sure you considered for your comparison that STU is practically without bank debts (liabilities to assets 42,8%), while VSL is fully loaded, so to speak (liabilities to assets 81.5% - maybe they have aspirations to turn into a bank and have already the necessary debts :p ;

VSL better have a higher EBIT margin to pay for all these nasty interests STU does not need to worry about.

It is pleasing to see that they still have some of that $80m they begged for a few years ago. Some punters fronted up with $1.23 a share lol

At the time they seduced punters with a veiled promise of Normalised EBIT of $40m in a few years (say 2021) ..........what was last years EBIT .... $32m I believe and heading for less this year even though they have done so many fantastic things

[BlackPeter]

It is pleasing to see that they still have some of that $80m they begged for a few years ago. Some punters fronted up with $1.23 a share lol

At the time they seduced punters with a veiled promise of Normalised EBIT of $40m in a few years (say 2021) ..........what was last years EBIT .... $32m I believe and heading for less this year even though they have done so many fantastic things

Hmm - I guess nobody had to hold STU during the capital raise - I bought in much later and cheaper, and they nontheless pay me good dividends plus offer capital appreciation.

But just wondering - are you trying to say with the CR reference that VSL still needs to raise capital in order to get rid of their strangling debt load?

I guess - would make sense, wouldn't it?

Interesting stuff, anyway ...

[Shareguy]

I asked this on investor call some time ago regarding the margin comparison.

Mark said

The margin comparison is a little misleading. Stu includes freight and labour costs in there gm. Vulcan does not. Mark said that as a comparison stu would be in the high 30"s excluding the freight. So still a difference but a lot closer. A lot of the difference is down to Vulcans downstream plate and coil processing which is at high margin. Stu are planning on addressing that with some investment in this area.

[Shareguy]

STU's 1H24 result had gross margin per tonne growth offsetting the lower-than- expected sales volume: Volume declined 22% vs pcp while GP$/tonne grew 9% to NZ$926/tonne vs 1H/2H23, which is a positive takeaway from this result. 1H dividend NZ4.0cps, fully imputed, at 125% payout and above the 60-80% EPS payout policy range, signalling management confidence in the business already passed the bottom of the cycle, and its current net cash position.

So my take is we at bottom of cycle and management have confidence in that with divi higher than payout policy. Its net cash position gives stu the ability to take advantage of opportunities. Also I'm convinced that stu like a number of beaten down NZX companies will look attractive to others, especially when we have confirmation of interest rate cuts. There is a lot to like here even at current price levels.