Steel & Tube won't pay final dividend, may need equity raising, Craigs says

Steel frames support the roof in the West Lecture building, in Christchurch's Arts Centre. Photo by David Williams

Steel & Tube Holdings is unlikely to pay a final dividend this financial year and may have to raise equity as its earnings and debt come under pressure, according to research house Craigs Investment Partners.

The Lower Hutt-based manufacturer and distributor of steel building supplies warned last week that it expects to post a 2018 loss before interest and tax of about $38 million and breach its banking covenants after a restructuring that will see it write down the value of its assets by $54 million. It said it was seeking a waiver from its banking partners for the breach and expects to make a decision on the payment of a final dividend for the 2018 financial year, in line with its policy, when the financial result is finalised.

"While Steel & Tube expects to see earnings improve due to its change programme and is divesting assets, this is a difficult position for a low-margin cyclical business and places pressure on the dividend and opens the possibility of an equity raising," Craigs research analyst Chris Byrne said in his report titled 'Bent out of shape'.

Given the company's uncertain operating environment, high gearing and decline in underlying earnings, Byrne expects Steel & Tube to cut its dividend for the 2018 financial year to 7 cents per share from 16 cents in 2017, in line with its policy of paying out 60-to-80 percent of normalised net earnings.

This would result in no final dividend given it has already declared an interim dividend of 7 cents per share, Byrne said. He expects the company's net debt to be more than $100 million at the end of the June 30 financial year, sitting at about four times underlying earnings before interest, tax, depreciation and amortisation.

"Unless Steel & Tube can drive significant earnings growth in FY19, current gearing levels open the door to a potential equity raising," he said.

Byrne lowered his 12-month price target on the stock to $1.50 from $2 in his May 23 report. The shares recently dropped 0.7 percent to $1.47, and have shed 29.5 percent this year.

Steel & Tube expects to release its 2018 results on Aug. 31.