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Steel & Tube may be interested in Fletcher assets if review prompts sales, CEO Malpass says

Friday 23rd February 2018

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Steel & Tube is open to opportunities that might shake out from Fletcher Building's strategic review as it beds in change at its own business to strengthen its balance sheet and improve earnings.

The Lower Hutt-based company trimmed net debt by 25 percent to $96.7 million in the six months ended Dec. 31 after the board firmed up plans for a more robust capital structure alongside a restructure to improve margins after a series of acquisitions broadened the steel products manufacturer and distributor's revenue base. Steel & Tube wrote down inventory by $5.5 million and bore $2.6 million of restructuring costs, which contributed to a 64 percent decline in first half profit to $3.8 million. 

Steel & Tube expects those actions to simplify the business and capture the benefits of a series of acquisitions between 2014 and 2016 that added large bore pipes, fasteners, steel floor deckings, and stainless steel to its suite of products, ultimately bolstering earnings in 2019 and 2020. 

"Our board are very focused on execution and improving the results within Steel & tube," chief executive Mark Malpass told BusinessDesk. "We have a very clear pathway ahead of us in improving our base business, absorbing and capturing value from acquisitions made to date." 

While that's the company's focus, Malpass said the firm wouldn't pass up the "window of opportunity" that may come from Fletcher Building, which is going over its own business with a fine-tooth comb. 

"We're open to opportunities that may pop out of their strategic review," he said. "If the right opportunity came across that space then we'd look at them."

New Zealand needs "supply chain players of scale" and Malpass said he's sympathetic with Fletcher's plight, where Buildings + Interiors vertical construction unit bid for projects with razor thin margins without the ability to pass on cost blow-outs.  

Chair Susan Paterson said generating headroom on the balance sheet gives Steel & Tube options when and if those opportunities arise, with the company's gearing ratio - net debt to net debt plus equity - at 31 percent from 37.4 percent a year earlier, near the lower end of the 30-to-35 percent target. 

"If other opportunities come up, it's great to be in a position of strength to look at those," she said. 

Paterson took over as chair last year in a changing of the guard in Steel & Tube's boardroom, which she says has raised the "industry experience" among the firm's directors, and accompanies a similar reset in the firm's management, with Malpass replacing Dave Taylor on an interim basis for five months and who was yesterday appointed permanently. 

Malpass said achieving supply chain procurement scale is a missed opportunity by Steel & Tube, with the firm's cost of sales around 80 percent of revenue, and the focus on inventory management and roll-out of a new enterprise resource planning (ERP) system should improve those margins. 

Steel is still a "highly competitive market" that can "often drive low margins" and Malpass said the company has "to be very selective in terms of the projects we take on to ensure the risk/reward is commensurate". 

While Steel & Tube is often linked to the construction sector, Malpass said that only accounts for 45-to-50 percent of its revenue now, with the rest in manufacturing and rural sectors. 

However, "all of them showing very positive momentum for the next few years" with the national pipeline of work still strong, he said. 

Steel & Tube shares rose 1.5 percent to $2.09, having dropped 15 percent over the past year. 


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