UPDATE: Steel & Tube shares drop 8.9% on earnings downgrade

(Updates and recasts on share price, adds broker comment)

By Paul McBeth

May 20 (BusinessDesk) - Steel & Tube Holdings shares dropped 8.9 percent after the steel products maker cut its earnings outlook.

The shares fell 11 cents to $1.12 in early trading after the company said it expects normalised earnings before interest and tax of $15.5-17.5 million in the year ending June 30, down from previous guidance of $25 million.

Steel & Tube restated its 2018 non-GAAP earnings, excluding the divested plastics unit, to $13 million after finding a $4 million inventory write-off related to the production process which should have been included in the cost of goods sold.

That alone would have lowered the 2019 guidance to $21 million, however, tighter competition and lower prices for some its higher value products cut the outlook further.

Grant Williamson, a director of Hamilton Hindin Greene, said investors typically tolerate one earnings downgrade, but can get "pretty harsh" when more emerge.

"The construction sector and supporting sectors are going through a pretty tough time at the moment. Investors need to realise it does take time to turn things around," he said.

Steel & Tube's board still expect to pay a final dividend in line with the company's policy and said it has headroom over its key banking covenants.

"While Steel & Tube has grown market share, volumes and sales, the margin pressures noted in the first-half results have continued into the second half of the financial year," the company said.

Steel & Tube recapitalised last year after breaching a lending covenant when impairment charges and restructuring costs pushed it into the red.

It's been cutting costs by rationalising sites, internalising warehouse functions, making better use of freight, and restructuring to lift earnings. The downgraded forecast is still an uplift of 20-35 percent on the restated ebit.

"Operating cost discipline has continued and it is expected that a reduction versus the prior year will be achieved despite absorbing the full year impact of increased rental costs from sale-leasebacks, general cost inflation and the impact of NZIFRS 9 requirements," Steel & Tube said.

(BusinessDesk)

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