The slump, 22% lower than Steel and Tube's own forecast of a $4.1 million after-tax profit, could prompt its 50.3% majority shareholder, Australian-listed giant Onesteel, to launch another takeover offer.
The effects of the global financial crisis, exchange rate, decline in commercial work, increased competition and falling steel prices all contributed to the 30% decline in sales, from $273.7 million to $190.6 million, during the six-month period.
Following the announcement, Steel and Tube shares were initially down 2% at $2.70.
Steel and Tube Holdings chief executive Dave Taylor said the company had continued to focus on inventory levels, its management of debtors and discretionary expenses, which resulted in a $27.3 million positive operating cash flow, compared with a negative $8.8 million for the corresponding period last year.
"Our customers continued to pursue all opportunities to reduce costs as they also struggled to deal with the impact of the downturn, putting further pressure on margins," Mr Taylor said in a statement to markets yesterday.
Craigs Investment Partners broker Chris Timms described the result as disappointing and carrying an unsettling outlook, while Forsyth Barr broker Tony Conroy said the result was poor and even though it was well signalled by Steel and Tube, it still came in lower than Forsyth Barr had forecast.
Mr Taylor said economic indicators showed recessionary trading conditions had ended and a period of growth was ahead, but the strength and sustainability of any pick-up in activity was still uncertain.
"Activity remains subdued in the commercial construction and manufacturing sectors.
The rural sector, with the exception of dairy, where increasing milk powder prices are encouraging, is also relatively subdued," Mr Taylor said.
Onesteel, with a market capitalisation of $A4.1 million and a 50.3% stake in Steel and Tube, had withdrawn a takeover play, offering $4 per share, in October 2008.
Mr Timms said yesterday's poor result would likely act as a catalyst for Onesteel to again look at a takeover move.
"It's inevitable that Onesteel will at some time come back into the game to gain full control," he said yesterday.
Mr Timms said for long-term investors a cyclical recovery would eventually lift Steel and Tube's earnings and its balance sheet was in good shape, but there remained "considerable uncertainty".
"Management is also casting doubt on the strength of the current residential recovery.
As it is, any recovery will not have a meaningful impact on the second half of 2010," he said.
Mr Conroy was less bullish on the prospect of Onesteel launching another takeover, at current share price levels, but believed it could be possible if the price fell below $2.50 per share.
He said Steel and Tube's capital management helped it reduce net debt by $17.5 million to $30 million and holding lower inventory was a key source of improvement in working capital.
However, he said Steel and Tube's profitability was heavily indexed to the commercial and the manufacturing-agricultural sectors and risk to near-term earnings, out to June 2011, was negative.
"The reality of the first-half result is likely to cause the market to downgrade full-year consensus forecasts from around $15 million to $10 million, or even lower," Mr Conroy said.
Forsyth Barr's preliminary change is for a full-year 2010 reported profit to be lowered from $10.2 million to $8.9 million.
Forsyth Barr added, its stock recommendation was to reduce holdings.
