New look Steel & Tube board under pressure after seeing off takeover

Steel & Tube chair Susan Paterson fronts up to shareholders today. Photo / Supplied

There's nothing like putting yourself under pressure to perform.

Steel & Tube chief executive Mark Malpass and chairwoman Susan Paterson find themselves in this position as they prepare to address shareholders at tomorrow's annual general meeting.

Investors will be looking for some hard evidence that the company's new strategy will deliver a turnaround following a dreadful year for the construction supplies company.

They will also be looking for assurances the company has addressed the issues that led to it being fined a record $1.9 million for making misleading representations about earthquake-grade steel mesh products.

The charges, brought by the Commission Commission, related to conduct spanning four years and $42m worth of product. Since then a new-look board and management team have been looking to right the ship.

Meeting expectations has been made all the more important in light of Steel & Tube's staunch response to a takeover approach made by Fletcher Building, which eventually was withdrawn and then superseded by Australian company Bluescope Steel's purchase of a 15.8 per cent blocking stake.

Malpass, who was appointed to the top job in February after filling in following the sudden departure of Dave Taylor last September, has embarked on a major restructuring and business transformation programme.

The company slumped from a $20 million profit in 2017 to a $32m loss for the year ended June 2018 after taking $53m of asset write-downs and impairments. Revenue declined from $511.4m to $495.8m.

But it's now forecasting earnings before interest and tax of more than $25m for the 2019 financial year, rising to $40m in three years.

These numbers were reiterated last week in response to Fletcher Building's non-binding, indicative offer of $1.90 per share, which was below Steel & Tube's advisor's valuation of $1.95-2.36 per share.

The share price has since settled at about $1.37 following the takeover activity, clearly implying the market is unconvinced by these forecasts and valuation assessment.

Meanwhile, Paterson and her board may face questions from shareholders relating to their response to Fletcher's approach and whether they were too dismissive.

A key issue is the wide gulf between the valuation range put forward by Steel & Tube's advisor; the $1.15 per share placement just six weeks earlier and general market sentiment the construction market had peaked.

Asked what had changed since then, Malpass said the placement and rights issue that preceded it were conducted at a discount in line with other equity issues of the same nature.

The company hadn't carried out a detailed discounted cash flow (DCF) valuation at the time of the capital raise and the board decided to commission one in response to the takeover.

Steel & Tube CEO Mark Malpass remains bullish about the company's future prospects. Photo / File

Malpass said FNZC's view took into account conservative assumptions around market growth activity, Steel & Tube's "strive" business transformation programme and was a long-term assessment of value.

"At a very simplistic level you can see why [the valuation is being questioned]. The reality is the $1.95-$2.36 was done on long-term cash flow forecasts for the business," Malpass said.

"We are a new team with a new board with industry experts who understand the capability and the bones of the Steel & Tube business. We've developed a strategy which drives our earnings both from within as well as regaining customers.

"We are not assuming here that we have some heroic market share gains out of the market place. We are just assuming market growth in an infrastructure market in New Zealand which is expected to keep pumping for some time in the future.

"On the commercial side we are assuming forward softening in those markets … and we are being very realistic about that."

Malpass says the company has reduced its facilities to 30 from 50 and will be down to 30 within 12 months. It is also integrating acquisitions that had been left untouched until now.

Analysts remain cautious, however, with Craigs Investment Partners maintaining a target price of $1.35 and suggesting there's a disconnect between the market's view of Steel & Tube and that of the board and its advisor.

"While we are of the view that if STU can execute on this and hit its targets it could re-rate, a turn-around is not easy, with key risks being execution, a deterioration of market conditions and competitor behaviour," Craigs analyst Chris Byrne said in a research note.

Based on Byrne's analysis, Steel & Tube's share price would have to be greater than $2.40 post dividends by the end of 2021 to have added value above the Fletcher Building proposal.

Malpass takes a different view, saying the Fletcher proposal has to be looked at in the context of Commission Commission approval, which he says would be unlikely, at least not as a straight amalgamation without significant remedies.

"I understand that the optics of a $2.15 type number versus where the stock is trading at today may look large, but before the capital raise we were about $1.46. We discounted it similar to other discounts and I don't think there's anything abnormal in the numbers we are assuming and we believe in those numbers and are on track to achieve them."

The difficulty is that shareholders didn't get a chance to assess the Fletcher offer with an independent appraisal report.

Steel & Tube can't afford to make any mistakes. As one market watcher says, nothing short of perfect execution will suffice.