Steel & Tube | A2 Milk’s weak result | EBOS | American Telcos?

21 August 2023

NZ

Good results from Steel & Tube – strong operating cashflow ($98.3mn) and revenue of $589mn. Earnings came in at $32.1mn compared to $47.9mn (due to the FY22 supercycle). Inflation is still a killer here – any pricing power was offset by sticky inflation. It’s nice to see debt sitting at zero, with a facility of $100mnto be drawn on. Management expects FY23 to represent the bottom of the cycle –we think it may extend a little longer. Compared to other industrials (Metro Performance Glass) they’ve handled the cycle well.

Weak result from A2 Milk though roughly in line with expectations – down ~8.00% as of writing. 10% increase in revenue to $1.59bn but a weak macro outlook in China weighs upon the company – the birth rate is down 10% — there is a shrinking market for the company’s product. We like the stock a little cheaper, but here –even with the sell-off – we struggle to see value. Continue neutral-rated. We think EBOS feels interesting — down 25% YTD and earnings on Wednesday.


Something of Value?

Let’s talk about telcos. In NZ telcos are part and parcel of most institutional portfolios — Spark is a major constituent of the index. In the US they have been sold off like an unwanted orphan. AT&T (stock ticker: T) now trades at almost 20 year lows, while Verizon (VZ) trades at about 10 year lows.

This isn’t a particularly interesting or exciting idea — the telcos grow in the single digits and pay you a nice ~7.8% dividend, and while there is risk over ongoing litigation re lead cabling, we think the litigation risk is “priced in”  — expect about ~$4bn from each co in capex to replace said cables. However, we think they are unloved utilities with monopoly-like characteristics trading at very good prices. They are “value” stocks in the way Walter Schloss went about it (his first stop: look for companies trading at a 5 year low). We think these may be good value  “buys” for a portfolio that is hunting for value.  Note that over the ditch (in the UK) Vodafone PLC is trading at similar lows, with several activist investors taking stakes (Xavier Niel, who purchased 2.5%). Note these are deeply unloved stocks, and investors shouldn’t expect a quick return — “in the short term the market is a voting machine, in the long term it is a weighing machine”.


Chart: Down down down — the value of Teslas

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