By Jenny Ruth
Tuesday 10th May 2011
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The long-term benefit to Steel & Tube Holdings from reconstruction following the Christchurch earthquakes should be considered alongside a presently weak residential and non-residential building sector, says Kar Yue Yeo, an analyst at First NZ Capital.
"Feedback from our discussions with participants in the building sector suggest trading volumes have moderated due to weaker building approvals since the second half of 2010," Kar Yue says.
"We think the risk-reward for Steel & Tube is relatively balanced."
Steel & Tube's earnings and return on invested capital have bounced off cyclical lows but don't yet have the support of a recovery in volume, he says.
Despite the strength of the New Zealand dollar against the US dollar,the steel price is 9% higher than a year ago and industry participants have raised pricing between 5% and 18% across different products in the past two months.
Provided pricing discipline is maintained, this should be positive for Steel & Tube in the June quarter and in the year ending June 2012, Kar Yue says.
For the stock to be re-rated, there needs to be evidence of a recovery in demand for steel products. This, "whether quake-driven or in the underlying market, is unlikely to be material until late in the second half of 2011."
Rating: Neutral (downgraded from Outperform).
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