STU - Steel & Tube Holdings

[Getty]

Well, after that day of heart stopping news, the SP held to 58c, and some traded at 60c.
Maybe STU is not short for stupid afterall.

[SailorRob]

Ok some positive news for you all.

While I understand the frustrations of long term holders...

If Steel and Tube continue to perform just as they have done in the past, including continuing their many mistakes, then what you are looking at is a phenomenal company and investment opportunity.

What have I been smoking, how can I think that? Because of the most important number of all. The price you pay for it. Let's take a look at some numbers.

In the 13 financial years to 2019 (including the full GFC) after subtracting the 80 million which was taken back in the equity raising, STU has paid out in dividends fully covered, $116 million. Or an average of $9 million a year for 13 years. Against current market cap this is close to a sustained 10% yield for 13 years.

Cash flow from Operations was $283 Million or an average of $22 Million. Using 2020 numbers would actually increase this average. Of this $283 million, $135 million has gone back into the business in one form or another. That's 47% of all Cash from operations. Yes a lot of that money has been destroyed.

This leaves $148 million of true free cash flow, in the most conservatively measured sense. This is an average of $11.4 Million over a fully 13 year cycle including the worst crisis since the great depression.

That's a 12% free cash flow yield averaged over 13 years... Remember the free cash flow as measured conventionally would be much higher than this. If capital allocation improves in the future then this number will only be better.

Cash flow continues to be incredible even through first half 2020. Someone commented that a lot of it has been generated from change in working capital. I agree but this isn't a bad thing, they had too much inventory and it's value had a question mark over it. Now it's been turned into cash that value has been realised. As pointed out, they can't keep selling down inventory, that's why we look at 13 years of performance.

17.5 million cash on the balance sheet against 10 million long term debt.

Net working capital minus all debt is 124 million against a market cap of 96 million.

This investment case only requires that they continue to mess up everything they touch in order for it to be a great investment. The possibilities with any improvements from here and very different again.

Show me a better company on the NZX which is a good investment at current price even if it has no future growth and the board continues to be hopeless.

[winner69]

Hey Rob

You could write the same about Metro Glass (different numbers of course) ......and come to same conclusion

Cool eh

[forest]

I like your post SailorRob

Some time ago there was talk of possible class action for incorrect documentation or maybe substandard quality of products. I have not followed the process of this dispute, has this issue been resolved? Anybody knows?

[SailorRob]

Hey Rob

You could write the same about Metro Glass (different numbers of course) ......and come to same conclusion

Cool eh

Not familiar with the company but a quick look at the balance sheet alone tells me it's not the same.

There are only a small handful of companies in the world that would compare to Steel and Tube. I screened over 9000 companies in America in April and I can't remember what STU market cap was at the time but similar to now and on a Net working capital basis there were 26 companies out of the 9000 that screened cheaper.

There would be many similar on the free cash flow basis but I bet the number that have the same margin of safety in terms of Net working capital and the history of free cash generation would be single digits.

I'll run the numbers and check it out. I get your point but I just can't imagine that it's the same cash flow generating machine that STU has been for the last 13 years and probably a lot longer.

Have they really paid out 1.25 times the entire current market cap to shareholders in cash in the last 13 years? If so then I'm buying.

[winner69]

Rob ...you will only get 5 years of stuff on Metro but pretty IPO is a available but clouded by private equity carry on clouds the underlying performance.

[SailorRob]

Thanks Winner will take a look now.

Also forgot to add that STU has an average return on Equity for the 13 years of 9.2. If they can even do close to that going forward then buying at a fraction of book value should be a great investment.

Would love some constructive criticism.

[winner69]

Not familiar with the company but a quick look at the balance sheet alone tells me it's not the same.

There are only a small handful of companies in the world that would compare to Steel and Tube. I screened over 9000 companies in America in April and I can't remember what STU market cap was at the time but similar to now and on a Net working capital basis there were 26 companies out of the 9000 that screened cheaper.

There would be many similar on the free cash flow basis but I bet the number that have the same margin of safety in terms of Net working capital and the history of free cash generation would be single digits.

I'll run the numbers and check it out. I get your point but I just can't imagine that it's the same cash flow generating machine that STU has been for the last 13 years and probably a lot longer.

Have they really paid out 1.25 times the entire current market cap to shareholders in cash in the last 13 years? If so then I'm buying.

Your comments have piqued my interest and there is obviously a lot more to your methodology than what you’ve outlined

SKT has paid over $1 billion in dividends last 8 years and its current market cap is $239m. That’s payout of over 4 times market cap. It’s working capital to market cap looks good as well.

[SailorRob]

Yeah it's where the dividends have come from, are they covered by free cash flow as well as all capital expenditure plus any acquisitions being covered (or have the acquisitions produced additional cash flow that provide a decent ROIC) and have they been clawed back by equity raising. Has there been a material change in the business which will affect the free cash flow generation going forward.

Usually the case is the market cap has fallen off the planet due to inability to produce that cash going forward which makes comparing it VS historical cash flow generation irrelevant. Of course you're well aware of all this, just commenting for anyone else following.

With Metro, they have paid out a lot in dividends over the 5 years, 48 million roughly the current market cap, however they have only cleared 23 million in free cash flow as measured in the STU analysis and have taken on net 28.5 million in debt during that time.

The numbers don't look bad at a quick glance but it's not the same as a 13 year track record covering the GFC.

Ultimately Metro are spending more than what they're bringing in and funding the difference with debt, whether the debt is paying the dividend or the acquisitions, I'd argue it makes no difference. Now I know you're thinking that's exactly what STU were doing, yes but they clawed back 80 odd million in the equity raise which I have adjusted for.

You're not going to hear me argue that STU is a great company, but it's a journeyman and way oversold. What attracts me is that nothing needs to change to make a compelling case at these prices. They have proved they can't grow nor allocate capital, they are aware of their mistakes and all I need is for them to continue being hopeless but not get too much worse and I'll be very happy. Now if there is any improvement...

[liam]

[QUOTE=SailorRob;840440]Yeah it's where the dividends have come from, are they covered by free cash flow as well as all capital expenditure plus any acquisitions being covered (or have the acquisitions produced additional cash flow that provide a decent ROIC) and have they been clawed back by equity raising. Has there been a material change in the business which will affect the free cash flow generation going forward.

First time posting here, but STU is honestly the only NZX company I'm really interested in at these prices. I believe, after making an excel spreadsheet with financial info going back until 2005, that their biggest downfall was paying TOO much of a dividend. Their policy was to "pay half of net profits" but in the end, cash is king and profits can only pay what cash can back up, and they had to take on debt to fund the rest. From 2005-2010 they had zero cash and borrowings of around 40 mil. By 2017 their borrowings had ballooned to 133 mil and the dividend they paid was 10 times the free cash flow. It was stupid. It wasn't their cash flows that was the problem, it was their return of it to the shareholders which winded up bringing them down a debt and leveraged rabbit hole.

Bit of a young tangent there, but basically, I'm also pretty bloody bullish on it based on a) if they just keep as they are, I'd say there'd comfortably be FCF returns of over 10% per year (adjusting for them currently selling off surplus inventory) and b) the cash flows they have made in the past were without their current cost cutting measures, though I have zero clue about how good these actually are a company's word is never to be trusted, but theoretically if previous years' performances are adjusted for the reduced capital etc might be looking good?

Unfortunately Steel distribution and processing is pretty far from my circle of competence (basically tech) so really just wanting to know about the industry landscape, overseas competition, price war with Fletcher Steel (??) and anything else that may drive them away from ever returning to early performance. Pretty new to investing, but those are my thoughts. Cheers