Steel & Tube

Company: Steel & Tube Sector: Steel distribution Overview: Steel & Tube Holdings’ share price has been reinforced over the last week after their capture of Fortress Fasteners. The purchase is expected to be completed within six weeks for $26 million in cash and $6m in Steel & Tube shares.

The acquisition adds more diversification to Steel & Tube’s portfolio of products, and should be earnings accretive from the get go. The company has sufficient funding to cover the acquisition without over extending itself, and will probably continue to look for other complementary businesses. Steel & Tube noted in its half-year result that ‘‘steel demand is steadily recovering, led by construction related products.’’ Steel & Tube will be releasing their full year result in August, which should show strong earnings and revenue growth from last year. A higher dividend is also likely, which could see the gross dividend yield rise to 9 per cent on this week’s share price.

Whether the construction growth and subsequent recovering demand for steel continues is a major factor for the company looking forward. Perhaps more pressing for the company is the faltering demand for iron ore internationally. Iron ore, steel’s main raw material, is off almost 50 per cent in the last year on a lacklustre demand from China. This has flowed through to steel prices and will impact the value of Steel & Tube’s inventories. The lower commodity prices has coincided with a large drop in the New Zealand dollar against the US dollar, which will help to counter the potential of a write down in the value of Steel & Tubes inventories. Price performance: The company is trading relatively flat for the year, but is up 10 per cent since the acquisition announcement. Investment outlook: A solid result is expected, but much will depend on market forces outside their control and on the outlook provided by the company when they release their full year result.