The company announced more than $50 million in downgrades on Wednesday, and also that it had breached one or more banking covenants, prompting talks with its bankers.
Steel & Tube’s share price was subsequently savaged by investors. Yesterday it had retraced some of its earlier 20% losses to trade up to $1.62, down about 35% on a year ago.
Earnings before interest and tax (ebit) had been expected around $31 million, but were downgraded to a $38 million ebit loss.
Forsyth Barr broker Damian Foster said Steel & Tube’s latest profit warning was one of its more dramatic, incorporating a guidance downgrade, business closure, impairment, inventory write down, and debt covenant breach.
"The business continues to pay the price for a series of missteps over recent years, and these will continue to represent challenges for the new management."
Forsyth Barr was maintaining its "neutral" rating on the stock, but Mr Foster emphasised it was difficult to hold any firm investment view, and shifted the risk rating to "speculative".
"The medium-term earnings outlook, uncertain at the best of times, is now completely opaque," Mr Foster said.
Steel & Tube announced it expected to write off at least $12 million from either sale or closure of its plastic irrigation division, and intangible assets down by a further $10 million, as well as making a full year $23 million write-off of old inventory.
The company described the write-offs as dealing with legacy issues, and believed it would be back into profitability by full year 2019.
Craigs Investment partners broker Chris Timms said pressure was now building on Steel & Tube’s earnings and balance sheet, and its changes programme "must succeed."
Due to uncertainty in debt levels and earnings, Mr Timms said there was an implication for a dividend cut, and potential need for equity raising.
However, Steel & Tube ruled out an equity raising.
Both brokers were concerned about Steel & Tube’s debt levels. Mr Timms predicted debt would be more than $100 million by next month, while Mr Foster said debt levels needed to lower.Both believe the debt level could see dividends cut.
"We suspect STU’s discussions with domestic banks will likely be easier than Fletcher Building’s recent negotiations with its offshore lenders," Mr Foster said.
However, no matter the outcome, Steel & Tube was over-extended and needed to de-gear debt, with Mr Foster picking that could lead to a cut in dividends.
The magnitude of Steel & Tube’s profit warning had re-emphasised the lack of visibility and the challenge in forecasting future earnings, he said.
Mr Foster said Steel & Tube had inherently dramatic earnings leverage to volatile prices, margins and operating expenditure.
There was also a lack of any detail on the current year’s earnings composition, negative momentum in the business or the new management’s restructuring initiatives.
"There is a very high margin of error in Steel & Tube’s earnings outlook, valuation assessment and investment view," Mr Foster said.
