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Steel & Tube expects 2019 profit following downgrade, shares drop 21%

Wednesday 23rd May 2018

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Steel & Tube Holdings says investors can expect a return to profitability in 2019, following a significant downgrade which has seen the stock shed up to a quarter of its value.

Earlier today, the Lower Hutt-based business said it expects to post a loss before interest and tax (ebit) of about $38 million this financial year, from positive ebit of $31.1 million a year earlier, and breach its banking covenants after a restructuring that will see it exit its plastics business and write down the value of its assets.

It said normalised ebit would be about $16 million, excluding non-trading costs and impairments of up to $54 million. On a conference call this morning, chief executive Mark Malpass said shareholders could "absolutely" expect a return to profitability in the next financial year.

"These are one-time non-trading impacts we're taking that are associated with legacy issues."

The $54 million in writedowns is comprised of $12 million from selling its plastics buisiness, $18 million on inventory from its new enterprise resource planning (ERP) system, and $10 million on other intangibles. The company also took a $5.5 million impairment on inventory in the first half, and Malpass said $2 million came from business changes within its reinforcing division, $1.8 million from restructuring, and $4 million in other one-offs.

Chief financial officer Greg Smith said the company doesn't anticipate any equity raising, though it will breach its ebit-to-interest cover ratio, of a minimum of 2.25 times, and possibly another covenant temporarily, and is seeking a waiver from its banking partners.

"These are some significant writedowns for us but we're moving forward from this point, and the changes we're making and looking to drive underlying earnings back into the business, we're not anticipating any equity raise is required," Smith said. "We'd expect to operate back within our covenant levels on a go-forward basis."

Malpass said he hoped the market hadn't lost faith in the company, with the stock down 24 percent when the market opened, and recently trading at $1.57, down 21 percent. 

"We're very confident between the board and management that this is a great business, it's a strong Kiwi company that's been in operation for over 60 years and we see that continuing for another 60 years," Malpass said. "It's a lot of money and something we're very disappointed with as a team, but they're largely legacy issues we're cleaning. This is a new broom coming through and refreshing the business, you can expect there are going to be some one-time impacts that we've crystallised in this announcement and we're moving forward from this point."

Smith said he couldn't yet give an update on the tax impact of the update, as the company has been finalising its earning outlook in the last 24 hours, but said he would expect a tax break on the stock writedown and $6.5 million of cash items, not on the asset impairments.

The fault in the ERP system, Steel & Tube's IT, is associated with volume impacts, Malpass said. 

"When we first launched the system on Oct. 2, we were having performance issues pretty much from the get go."

This meant slower customer transactions and manufacturing processes, he said, though the company has now been able to largely resolve those issues and is back trading at the speeds it would expect.

Malpass said the company has been working with key customers over the past six months, and believes it won't lose them as it has long-lasting relationships, but is aggressively pursuing the over-the-counter cash-type customers it has lost.

(BusinessDesk)

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