Earnings in-line with forecasts Reported NPAT of A$116m was in-line with our A$119m estimate and recent guidance. Iron ore was the stand-out division, as was to be expected. Australian Manufacturing & Distribution divisions were below expectations, which was not too surprising in light of BlueScope�s result earlier in the week. OneSteel outlined similar reasons for domestic weakness to BlueScope, namely, weaker domestic demand, a higher A$, and higher raw materials costs impacting margins.
No quantitative guidance but divisional outlook upbeat Comments on the Manufacturing division were somewhat positive for the sector, with management acknowledging high raw material costs would impact margins early in the 3Q, as expected, but management believe there are encouraging signs volumes have bottomed and margins should improve in 4Q as price rises take effect.
Vertical integration a positive in rising input cost environment Despite a preference for flat products, we like OneSteel�s vertical integration into iron ore given rising input prices are eroding margins of non-integrated producers. Despite a challenging margin environment for the sector, rising steel prices bode well for steel stocks given the positive correlation between steel and stock prices.
Valuation attractive with 14% upside potential Our A$3.25 price target is the average of our DCF, SOTP and book value per share estimates. The valuation looks attractive on all these metrics, justifying a Buy rating, in our view. At our price target, OneSteel would trade at 14.0x P/E (FY11E), which is in line with its 5-year average forward P/E.
OneSteel reports 1H11 earnings Sales up yoy but earnings flat. Group Sales were up 11.3% to A$3,327.5m, which was below our forecast of A$3,508.4m. Iron Ore was the star performer, as was to be expected, with sales up 41% and EBIT up 144%. Group EBIT was up 1.8%, with the comparatively weaker earning performance (vs revenue) driven by the Recycling, Manufacturing and Distribution businesses, which were all down yoy. Reported NPAT of A$116m was in-line with our A$119m estimate and recent guidance. Adjusting for the costs associated with the Moly-Cop acquisition late in the period, underlying NPAT was A$125m. A dividend of 6c was declared. OneSteel declared an unfranked dividend of 6c (UBSe 5c) and reiterated their expectation to begin franking dividends from FY12. We are currently forecasting 13c dividends for the full year, up on our previous 12c forecast. Operating cash flow was solid at A$157m. Although down yoy (+A$324m), adjusting for the A$70m stock build incurred in advance of May blast furnace works, operating cash flow would be A$227m, which is a solid performance given weak domestic operations in steel making, distribution and recycling. As previously disclosed, the Blast Furnace work is to cost A$60-65m and is extend the furnace design life beyond 2020. Minimal EBIT impact is expected of A$0-10m EBIT, with the cash impact likely closer to zero as OneSteel maintains its coke ovens during the period enabling it to sell coke. The total production impact is to be 175kt, leading to the need to build inventory in advance of the re-design work. Price rises booked in February to take effect from April. Price rises of A$160/t were announced in Feb for reinforcing bar/rod products and HR Structurals have also locked in price rises of 13% in February after a 6% rise in December. Merchant Bar price rises of 14% have also been locked in for February and further price rises are planned for structural pipe products after a 7% uplift in December. Bridge financing to fund Moly-Cop on track for completion by April. The US$500m bridge matures in Nov-11 but management believe they will refinance by April. Gearing has increased materially following Moly-Cop to 29.7% from 17.7% but still within target gearing. The next material refinance is a A$1.1bn syndicated loan facility due FY13. Interest cover is a solid 4.5x (EBIT/Interest) so we do not foresee material refinance risk given the projected earnings profile. No quantitative guidance was provided but divisional outlook was upbeat. Comments on the Manufacturing division were somewhat positive for the sector, with management acknowledging high raw material costs would impact margins early in the 3Q, as expected, given recent movements in met coal prices, but management believe there are encouraging signs that steel product volumes have bottomed and margins should improve in 4Q as price rises take effect.
OST Price at posting:
$2.86 Sentiment: Buy Disclosure: Held
