STU - Steel & Tube Holdings

[percy]

A solid result from STU with half year underlying profit of around $8m, giving full year NPAT of $17m, an increase of 168% on the previous year.

SP up 2c.

I thought it was a good result,but the outlook commentary was very sober reading.

[Lizard]

I thought it was a good result,but the outlook commentary was very sober reading.

I agree, percy. The result was a touch above where I was expecting, but was a bit disappointed the outlook wasn't stronger. Then again, STU can be a bit like that and tend to be a bit more bumpy than others, so may surprise (either way!) at half year. Nice to see the big chunky div though - that won't go amiss.

[macduffy]

Yes, Lizard, STU management seldom seem to see the glass more than half full, even at the best of times. Can hardly blame them given the unpredictable nature of their sector and business conditions generally. I thought it was a pretty good result and a realistic assessment of prospects.

[SailorRob]

Ok some positive news for you all.

While I understand the frustrations of long term holders...

If Steel and Tube continue to perform just as they have done in the past, including continuing their many mistakes, then what you are looking at is a phenomenal company and investment opportunity.

What have I been smoking, how can I think that? Because of the most important number of all. The price you pay for it. Let's take a look at some numbers.

In the 13 financial years to 2019 (including the full GFC) after subtracting the 80 million which was taken back in the equity raising, STU has paid out in dividends fully covered, $116 million. Or an average of $9 million a year for 13 years. Against current market cap this is close to a sustained 10% yield for 13 years.

Cash flow from Operations was $283 Million or an average of $22 Million. Using 2020 numbers would actually increase this average. Of this $283 million, $135 million has gone back into the business in one form or another. That's 47% of all Cash from operations. Yes a lot of that money has been destroyed.

This leaves $148 million of true free cash flow, in the most conservatively measured sense. This is an average of $11.4 Million over a fully 13 year cycle including the worst crisis since the great depression.

That's a 12% free cash flow yield averaged over 13 years... Remember the free cash flow as measured conventionally would be much higher than this. If capital allocation improves in the future then this number will only be better.

Cash flow continues to be incredible even through first half 2020. Someone commented that a lot of it has been generated from change in working capital. I agree but this isn't a bad thing, they had too much inventory and it's value had a question mark over it. Now it's been turned into cash that value has been realised. As pointed out, they can't keep selling down inventory, that's why we look at 13 years of performance.

17.5 million cash on the balance sheet against 10 million long term debt.

Net working capital minus all debt is 124 million against a market cap of 96 million.

This investment case only requires that they continue to mess up everything they touch in order for it to be a great investment. The possibilities with any improvements from here and very different again.

Show me a better company on the NZX which is a good investment at current price even if it has no future growth and the board continues to be hopeless.

[winner69]

Hey Rob

You could write the same about Metro Glass (different numbers of course) ......and come to same conclusion

Cool eh

[SailorRob]

Hey Rob

You could write the same about Metro Glass (different numbers of course) ......and come to same conclusion

Cool eh

Not familiar with the company but a quick look at the balance sheet alone tells me it's not the same.

There are only a small handful of companies in the world that would compare to Steel and Tube. I screened over 9000 companies in America in April and I can't remember what STU market cap was at the time but similar to now and on a Net working capital basis there were 26 companies out of the 9000 that screened cheaper.

There would be many similar on the free cash flow basis but I bet the number that have the same margin of safety in terms of Net working capital and the history of free cash generation would be single digits.

I'll run the numbers and check it out. I get your point but I just can't imagine that it's the same cash flow generating machine that STU has been for the last 13 years and probably a lot longer.

Have they really paid out 1.25 times the entire current market cap to shareholders in cash in the last 13 years? If so then I'm buying.

[winner69]

Rob ...you will only get 5 years of stuff on Metro but pretty IPO is a available but clouded by private equity carry on clouds the underlying performance.

[winner69]

Not familiar with the company but a quick look at the balance sheet alone tells me it's not the same.

There are only a small handful of companies in the world that would compare to Steel and Tube. I screened over 9000 companies in America in April and I can't remember what STU market cap was at the time but similar to now and on a Net working capital basis there were 26 companies out of the 9000 that screened cheaper.

There would be many similar on the free cash flow basis but I bet the number that have the same margin of safety in terms of Net working capital and the history of free cash generation would be single digits.

I'll run the numbers and check it out. I get your point but I just can't imagine that it's the same cash flow generating machine that STU has been for the last 13 years and probably a lot longer.

Have they really paid out 1.25 times the entire current market cap to shareholders in cash in the last 13 years? If so then I'm buying.

Your comments have piqued my interest and there is obviously a lot more to your methodology than what you’ve outlined

SKT has paid over $1 billion in dividends last 8 years and its current market cap is $239m. That’s payout of over 4 times market cap. It’s working capital to market cap looks good as well.

[forest]

I like your post SailorRob

Some time ago there was talk of possible class action for incorrect documentation or maybe substandard quality of products. I have not followed the process of this dispute, has this issue been resolved? Anybody knows?

[Scrunch]

This investment case only requires that they continue to mess up everything they touch in order for it to be a great investment. The possibilities with any improvements from here and very different again.

Show me a better company on the NZX which is a good investment at current price even if it has no future growth and the board continues to be hopeless.

The problem with long-term historical modelling like this is that the market can permanently change meaning historical profitability never returns. For instance a chain of VHS video stores could have looked great through a similar calculation, but...

If a long-term horizon like 13 years is used, companies like CAV are also likely screen very well on your criteria. Across 2007 to 2011 CAV was paying a dividend of circa $12m/yr. Its current market cap is $23m. In the case of CAV their market cap/balance sheet had debt of $60-$80m appearing sensible. Then the market changed, profitability collapsed and this debt was a huge issue. CAV went down the no-capital raise, no dividends route so there is no $80m of new capital as per STU. Its taken years and years but good progress has been made on reducing debt. Progress on returning to good levels of profitability has been terrible. If however they successfully execute their new strategy, CAV could be a great investment.