Steel & Tube short on detail, could do better forecasts

Friday 2nd November 2001

Annual reports are mostly skite sheets where companies can tell stakeholders about themselves. Occasionally, however, one can glean useful information on how others perceive the company as well.

Steel & Tube's annual report, for example, has a note to its accounts showing that its $19.6 million in term loans from the bank carry an average lending rate of 7%. Since this is no more than a residential mortgage rate one can assume that the bank's credit analysts, after exhaustive research, have concluded that Steel & Tube is, so to speak, as safe as houses.

This is interesting given that the company had a rough time a couple of years ago when it barely made a profit. However, it has bounced back strongly and in the year to June made a net profit of $14.9 million on sales of $390 million. This is a modest gain on the previous result of $14.3 million on revenue of $403 million but 2000 covered 13 months. A normalised result, which the company quotes prominently in the report, shows net profit rose 11.6%.

The good performance helped the company pay down debt, most of which was short term. From $45 million short-term and $5 million long-term borrowings, the company now has $18 million short and $15 million long, reducing its total indebtedness by a third. As a result, its ratio of interest bearing debt to total assets is a modest 15%.

Another measure, shareholders' funds to total assets, is reasonably conservative at 61%. Combined with strongly positive net operating cash flows, it is apparent Steel & Tube is a low-risk entity.

It is also a low-growth, high-yielding company that pays out most of its earnings in dividends. Sometimes it pays out more than it earns.

Chief executive Nick Calavrias attributes the earnings growth in the past year to strong demand from the rural sector and export markets, plus internal cost cutting.

Unfortunately, he leaves his review at that, save for a few paragraphs on each of the company's business divisions.

His comments about the future are unrevealing and he appears to be hedging his bets. On the economic front, he says there is a "slight improvement with some downside possible if the economies of our major trading partners do not improve in the near future."

As for the company's prospects, "... the signals that we are receiving from the market place are rather mixed and inconclusive and as such it is difficult to predict the short- to medium-term demand for our products and services."

This is better than making some rosy but erroneous forecast but it gives precious little for investors to go on.

For a low-profile company, Steel & Tube has an impressive shareholder base. Although half-owned by Australian company OneSteel (resource giant BHP's steel division before being divested a year ago), there are another 7558 shareholders holding 44 million shares.

Considering this, the Steel & Tube annual report is somewhat short on detail. While it covers all the bases, it could reveal more about the opportunities and challenges facing the company and how it intends to deal with them.

Little is said about the Canadian economy or markets, despite the company making a third of its sales there through subsidiary A J Forsyth.

Segmented figures show this division is a weak link, with profit down sharply to $4.7 million on sales of $112 million, a margin of 4.2%. By comparison, the New Zealand assets delivered a margin of exactly double that.

Despite the decline in Canadian sales and profitability, A J Forsyth is addressed in a mere three sentences.

The five-year performance summary is one area where the company's disclosure is excellent. It shows detailed earnings and balance sheet information and a range of per-share figures and ratios.

Normally year-to-year comparisons would be difficult because of not one but two balance date changes in the past five years but the report helpfully gives annualised figures.

Steel & Tube has delivered a spare and workmanlike report but, considering its size and shareholder base, it should boost its level of disclosure.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. Internet: www.mcewen.co.nz, Email: davidm@mcewen.co.nz

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