Company Valuation

The purpose of this report is to provide a valuation of Steel & Tube Holdings Limited (STU) and in so doing, assist our clients to assess whether they should invest in STU as part of a low risk investment strategy.

2. Executive Summary

Using a discounted cash flow valuation model (DCF) we have valued STU shares at $2.17. Considering STU's current share price of $2.67, our findings suggest STU is currently overvalued by the market.

We see some volatility in the steel market and margin pressure going forward but considering the strength of STU's balance sheet and maturity of the business we feel STU would sit well as part of a low risk investment portfolio. We therefore recommend a buy on this stock in a range between $2.00 to $2.20.

3. Background - Steel and Tube Holdings Limited (STU)

STU was formed in 1953 with the merging of three New Zealand interests. Since then it has acquired many firms and grown globally, culminating in its current structure, which includes seven business divisions. One Steel Australia is the major shareholder with 50.3% ownership with the company having over 8000 shareholders in total. In terms of market capitalisation, STU is one of the top 50 firms on the New Zealand stock exchange.

STU's strength is underpinned by its financial backing from One Steel accompanied by its diverse market offering with seven business divisions and its distribution abilities with 16 service centres across New Zealand making it the largest distributor of steel in the country. With its competitive advantage of distribution, Steel & Tube is moving into a strong position for increased sales across all business divisions with the eventual rebuild of Christchurch. The Christchurch rebuild is currently moving slowly but there is significant commercial construction to be undertaken which is seen as STU's major New Zealand market.

An area of concern for STU is the predicted volatility in steel pricing through external factors such as the Europe debt crisis and the volatile NZ dollar. NZ dollar strength continues to create competitive pressure from imported Chinese product, which is of increasing concern for sales across all business divisions for STU.

4. Forecast for STU

Strong competition and a depressed building sector lie ahead for STU in the short term. With building consents for residential and non-residential building trending down (ministry of business and innovation website), only strong sales with the rebuild of Christchurch will balance any potential losses in sales numbers. Although the rebuild of Christchurch will attract strong competition with potential for discounted steel to secure market share which will affect margins on steel impacting on STU's bottom line. ASB reports sourced from http://www.voxy.co.nz/business/building-consents-extremly-weak-asb/1861/91501 also show a very depressed building sector in NZ with 2011 non-residential building consents in mid-April being 23% lower than the previous year. This report also highlights the main hope for the building industry being the Christchurch re-build which at present continues to be slow.

Low demand for steel, price volatility and uncertainty around the Europe debt crisis is driving low forecasted sales growth and tightening margins. We have been therefore been appropriately conservative in the growth projections that underpin this valuation.

5. Valuation of STU

5.1. Discounted Cash Flow (DCF) Valuation model

We have adopted the Discounted Cash Flow (DCF) valuation methodology as our primary valuation method. DCF methodology follows the fundamental principle that the value of a business is represented by future cash flows, discounted to present value, at a rate that reflects the time value of money and risk of those cash flows. This DCF valuation forecasts future free cash flows (cash available to claimholders) for the next five years and estimates a terminal value based on an expected constant growth rate beyond the projection period.

We have discounted STU's free cash flows using our assessment of STU's weighted average cost of capital (WACC) as the discount rate. We have estimated STU's WACC using the following inputs.

WACC Input Source Input

Risk Free Rate Five-year government stock yield. 5.5%

Market Risk Premium Price Waterhouse Coopers research on the New Zealand equities market 1924-2010. 7.5%

Equity Beta Review of monthly returns of STU compared to NZSE50 Gross July 2007 - June 2011. 1.11

Optimised Capital Structure Gearing Ratio Review of comparable companies capital structures Fletcher Building Limited and Nuplex Industries Limited. (See Appendix A, 1 for explanation) 35%

Cost of Debt Margin over risk free rate - source ASB 1%

Corporate Tax rate New Zealand corporate tax rate as at 30 June 2012 28%

Discount rate - Weighted Cost of Capital (WACC)

Based on the inputs in the table above, we have utilised the classical capital asset pricing model (CAPM) to estimate the expected return on equity at 13.9% and WACC at 10.6%. (See Appendix A. 2 and 3 for full calculations)

6. Projected Cash flows

6.1. Growth rate and Terminal Growth rate

Due to the difficult economic environment previously outlined, we have forecast decreasing growth rate over the next five years tending toward the long-term terminal growth rate of 2.5% beyond the projection period. The terminal growth rate is in line with expected inflation and suggests that market forces from competitors will eliminate any substantive competitive advantage and growth premium beyond 2016.

Revenue Growth Rate Assumption

2012 2013 2014 2015 2016 2017 terminal growth rate

4.5% 3.5% 3.0% 2.7% 2.5% 2.5%

6.2. Cost of Sales

Cost of sales has been estimated as a percentage of gross revenue at 77.8% reflecting 2011 actual result. It should be noted that increasing margin pressure would force this cost of sales percentage up resulting in less earnings and a lower valuation. Further analysis on this is provided in our sensitivity analysis in section 6.

6.3. DCF Analysis Summary and Conclusion

The table below summarises our DCF analysis of STU:

STU