Ann: Acquisition of OneSteel Aluminium business a, page-3

re: Ann: Acquisition of OneSteel Aluminium bu... This deal looks the goods to me. Some points I have made to start tracking:

1. The acquisition is going to catapult Sales to ~450Mpa (from ~300M), and tonnage to ~61K (from 45K). The business is more profitable than CAA as it produces 16Ktpa for a normalised EBITDA of $2.5M. CAA produces 45Ktpa for a normalised EBITDA of $2.1M. This will improve margins.

2. Gross margins are likely to improve further. If half of the 16Ktpa are extrusions (8K), and half of the 8Kt are sourced from CAA now, then with the acquisition, 100% will be sourced from CAA. Onesteel with continue to charge a premium on top of CAA sourced material but this premium will now flow directly to CAA accounts.

3. The purchase price is cheaper than the equivalent purchase price of CAA stock.
i.e. Onesteel=$19M for 16Ktpa, is $1189 per tonne
Capral=$70(current market cap) for 45Ktpa, is $1555 per tonne.

4. The synergies are quite large at between $7.5-$15M in total (3years). Clearly margins will improve, but sales are likely to escalate given the uptrend in volumes expected in FY14 (ref; housing starts etc). Capral is going to get an immediate margin improvement but also leverage to a upswing in trading conditions. If this doesnt eventuate at least they have margin improvement.

5. If CAA has 35% market share at 45Ktpa, then 8Ktpa should immediately move market share to 41%. Very important, given that 50% is owned by Chinese imports. The market will be less competitive giving Capral more control over price. The depreciation in AUD will mean that importers will have to raise prices in order to maintain margins. Arrium (who own Onesteel and in turn selling to CAA have already acknowledged this in their latest presentation, per below). This bodes well for CAA in taking market share.

6. The debt costs are negligible on a p.a basis. What is significant is the increase in capital. Over 460M share will be on issue for EBITDA of 2.5M FY13 (low case). On an EBITDA basis this is $0.005EPS (PE +35x), making CAA a very expensive stock at the moment. Clearly this is a long-term play, with significant leverage to an improving market.