STS - Structural Systems

[Lizard]

Structural Systems is a company I have been meaning to write up for some time and which I think should perform well coming into results season.

STS is a specialist provider of Engineering and Contracting services to the Construction and Mining sectors (more construction than mining, but lets not get picky...). Established 1959. Listed 1987 and clearly not heading for the ASX100 at any great pace...the price appears to have peaked in the late 1990's at just below $3 before falling off to a low around 40cps in 2003.

After a strong re-rate during the second half of 2005, the share price has stagnated at around the current price of $1.08 for most of 2006.

A heavy loss in 2004 (over 30cps) was followed by a large convertible note issue which meant fundamental analysis had to allow for dilution. Most of these have now been converted to ordinary shares and associated options, but fully diluted there are 47m share equivalents on issue. 2005 saw a return to profitability and resumption of dividends at full year with payment of 1.5cps. A HY dividend of 2.5cps brings rolling 12 mth yield to 3.7% plus franking credits. A share buyback is also underway to re-purchase and cancel 3.9m shares (10% of ordinary shares on issue), so my analysis allows for 43m shares.

The company is predicting a record FY NPBT of $6.0-$6.3m, an increase of 70%+ on 2005. This probably extrapolates to NPAT of around $4.3m, putting STS on a fully diluted P/E of around 10. The outlook should remain strong for the coming year. At half year, the company had cash of $7.9m (much of which will have been used for dividends and buyback) and minimal debt. Free cashflows are running ahead of NPAT, so the company should be in a strong position to pay higher dividends going forward or to expand through acquisitions.

Management seem solid if unexciting. With positive outlook and a likely increase in dividend yield, the shares seem unlikely to stay on a P/E of 10. My current valuation is $1.48.

[Lizard]

Has been climbing steadily and hit $1.30 today, though on low volume.

[lewinsky]

Hi there Lizard,
Just so you are not chatting to yourself. I like the prospects for STS. Good sector,good op cashflow,debt under control. Should have a good full year result. I think your $1.48 could be a bit low. But I said that about IMD as well.

Cheers

LEW

[Lizard]

NPBT forecast upgraded by approx 12% on that of two months ago, to $7.1m. Have upped my valuation to $1.54.

Glad to have company on this one Lew. Looks like we have $1.30 on some better volume today [8D]

[Costa]

Hi guys - at least now there are three of us following this share so you don't need to chat among yourselves.

I've been following STS for a number of months on sharescene after buying in several months ago. Have to agree with your comments - will be interesting to see their full year results but more importantly comments re outlook for FY2007. Encouraging in the latest profit upgrade to see the comments about how they have a good book of orders going into the next year.

Will also be interesting to see what the full year dividend will be.

[Lizard]

Hi Costa. Nice to have your input . Lewinsky and I turn up on ShareScene occasionally too.

Outlook will be interesting, though so far the companies of a similar nature that I've followed have stuck with "expecting to maintain growth in the coming year" - a statement which has little effect on valuations given some growth is already priced in.

[Lizard]

Result out - NPBT in as forecast at $7.2m and NPAT $5.3m - fully diluted 12.7cps or P/E of 10 at current price of $1.25. Nice surprise in the final dividend of 5 cps, which takes yield to 6.0% plus franking.

[corky]

Lizard

I'll preface these comments by saying I'm a novice at reading reports but...

one aspect I was surprised about in the STS report was the deterioration in cash flow from operations. Is this likely to be a timing issue (perhaps the Welsh tank works)? Any thoughts?

Thanks
Corky

[Lizard]

From my reading, the differences are all accounted for by movements in working capital - refer to note 19 for details. Last year there was a big increase in payables (coming from pre-payments) which boosted operating cashflow. This year the payables increased further (even larger pre-payments though lower trade payables), but was more than offset by a larger increase in receivables which reduced operating cashflow.

Personally, was a little disappointed to see the lower level of revenue and/or cash receipts in the second half. However, comments regards the expected 2007 revenues from the Welsh project and forward order book are reassuring at this stage. This is probably a timing issue and the high dividend level with suspended DRP and continuing share buyback suggests directors remain confident.

I am working on NPAT of $5.7m for 2007 - most of which can probably be achieved from a continuation of current trading plus the reduced interest payments as the convertible notes convert.

[corky]

Been a nice riser and seems to have settled at a new level with plenty of buying support at 1.50. Of course the buyback has hardly got out of first gear and provides solid support (highest buy back to-date has been 1.30 - how does the level they can buy at get adjusted?).

Corky