Company Overview: Vulcan Steel Limited (ASX: VSL) operates as an industrial product distributor and processor in Australia & New Zealand. VSL markets a broad spectrum of steel products, comprising stainless steel, engineering steel, and carbon steel, to various customers across engineering, manufacturing, fabricating, transport, and other market segments.

VSL Details

Robust Business Update for Nine Months Ended 31 March 2022:

• VUL reported ~34% Y-o-Y revenue growth to ~NZ$700 million for FY YTD2022 (ended 31 March 2022), as per the latest trading update released on 26 April 2022.
• Revenue from the steel and metals segments grew by ~42% Y-o-Y and ~21% Y-o-Y, respectively, during YTD2022.

Delivering Benefits to Shareholders:

• Increased Capitalisation: With the listing on ASX in November 2021, VSL expanded its market capitalisation by ~34%, from ~$933 million based on the offer price to ~$1.25 billion as mentioned in the Macquarie Australia Conference presentation released on May 4, 2022.
• Growth in TSR: The company delivered higher TSR (total shareholder returns) to the shareholders distributing ~NZ27.5 cents per share in 1HFY22 vs. ~NZ 9.9 cps in 1HFY21 and ~NZ13.7 cps in 2HFY21. It paid ~NZ$36 million interim divdend (1HFY22) to shareholders in 1HFY22.

Business Drivers as per the Latest Macquaire Conference Presentation:

• Growth Strategy: VSL is undertaking various business enhancement opportunities with the stated objective (given in the Prospectus) to grow its yearly run-rate revenue by up to ~NZ$60 million over three years. It expects these growth measures to generate revenue from FY23.

• Supportive Economic Outlook: VSL reports business confidence and encouraging market conditions in Australia as per the latest update given during the Macquarie conference. VSL reports a positive outlook for its activity in the manufacturing and agriculture sectors in New Zealand. The market conditions suggest a decline in global steel production in the short term, exacerbated by supply constraints due to the Ukraine Russia war and lockdown restrictions in China. However, the global steel demand is estimated to increase by ~2.2% in 2022.

1HFY22 Results in Spotlight:

Growth in Key Metrics, Source: Analysis by Kalkine Group

Key Metrics: Besides registering an increase in gross margin and EBITDA margin in FY21, VSL recorded a higher net margin of 8.9% in FY21 Vs. 4.5% in FY20. ROE rose from 21.3% in FY20 to 44.9% in FY21.

Profitability Trend, Source: Analysis by Kalkine Group

Top 10 Shareholders:

The top 10 shareholders together form ~50.71% of the total shareholding. Wells (Peter Kevin) and Boyd (Wayne Robert) hold a maximum stake in the company at ~­­­14.05% and ~5.56%, respectively.

Source: Analysis by Kalkine Group

Key Risks:

Source: Analysis by Kalkine Group

Improved Guidance: 

• VSL revised the earnings forecasts for FY22 as below based on the latest financial update recorded between February to the third week of April.
• New guidance for Pro-Forma EBITDA stands at ~NZ$236-$242 million Vs. ~NZ$194 - $204 million as mentioned in the previous guidance.
• New guidance for Pro-Forma NPAT stands at ~NZ$136-$140 million Vs. previous range of ~NZ$ 107-$114 million.
• VSL plans to publish the FY22 results on 24 August 2022.

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of VSL has been corrected by ~4.68% in the past one month. The stock is currently trading lower than the 52-weeks average price level band of $7.080 - $10.470. The stock has been valued using the EV/Sales-multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at some discount than its peers’ mean EV/Sales multiple, considering the COVID-19 disruptions, a relatively higher debt-to-equity ratio, and impact of interest rate changes. For this purpose of valuation, a few peers like BHP Group Ltd (ASX: BHP), South32 Ltd (ASX: S32), and Champion Iron Ltd (ASX: CIA) have been considered. Considering the trading levels, robust trading update, elevated nickel prices, supportive economic conditions in Australia, growth investments, an indicative upside in valuation, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the closing market price of $8.560, up by ~0.943%, as of 8 June 2022.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical issues prevailing geopolitical tensions. Therefore, it is prudent to follow a cautious approach while investing.

VSL Daily Technical Chart, Data Source: REFINITIV  

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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