Cost out driven earnings lift. No signs of rational industry margins: STU provided a trading update showing earnings improvement over the first five months of FY21 and provided 1H21 normalised EBIT guidance of $6.5-7.5m, up 23% at the mid-point relative to the pcp. This was largely driven by cost out (FY21 c$10m guided due to staff redundancies) and sub-leasing property. Revenue for the first five months of FY21 is tracking slightly lower relative to the pcp (albeit November in line with pcp), below expectations given a soft 1H20 and elevated NZ building activity. No guidance has been provided for FY21 as STU remain cautious on the outlook for 2H21. STU had been aggressive on pricing to start FY21 and we are yet to see any signs of the industry becoming more rational on margins. As a result, it is difficult to see value. Due to limited downside to current share price, we retain our neutral recommendation.
Cost containment ahead of expectations. CIP FY21 EBIT +48%: We lift our FY21 EBIT forecast by $5m to $16m. Assuming STU achieves the mid-point of guided $6.5-7.5m 1H EBIT range, our forecast implies a $2m improvement in 2H due to the labour cost reduction being weighted to the 2H. While STU has materially improved its near-term EBIT, revenue fell with cost containment the key driver. The indicated revenue decline was contrary to our expectations given FBU's recent positive trading update.
Zero debt on balance sheet. Potential for earnings payout lift: STU’s net cash position improved over the past five months from $7m as at June 2020 to $24m currently. In the final month of the half some working capital impact is expected to support seasonal inventory holdings and STU is negotiating the sale of its remaining property as part of its property divestment programme. The current dividend policy is to payout 60-80% of normalised net earnings. With zero debt on the balance sheet there is potential for a lift or top end earnings payout. We have a FY21 NPAT expectation of $7m, this translates to a FY21 dividend of 3.5cps (top of range payout), a yield of 4.1%. STU is on a PE of 18X (1BF), not cheap rel. to peers.
Target price increased, Neutral rating retained: Our DCF derived 12-month TP (WACC 7.8% and TGR of 1.5%) is $0.80 (from $0.67). Key risks included domestic competition, volatility in steel prices and change programme execution
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