Fair value, page-77

from the Australian today

"
Arrium (ARI) 34.5c
WE could apply the journalistic stick to this one and assert that Arrium investors face an agonising decision before Friday’s deadline to take up their rights. They don’t. With the steelmaker and iron-ore producer’s shares wallowing further since its monster $754m capital raising was announced on September 15, the rights — exercisable at 48c — are more underwater than a deep-sea squid. No sane punter would take up their entitlement, except as a gesture to underwriter UBS.
As for whether the shares are tempting at the trashed market value, punters are getting conflicting messages from the experts.

The gloomsters at Credit Suisse warn that Arrium’s underlying earnings could collapse to as little as $200m (compared with last year’s $886m) if current steel margins and iron prices persist.
Despite the raising, Arrium’s net debt could increase to $1.5bn “with interest cover approaching critical levels with respect to covenants”. The firm stresses this is only a possibility rather than the “base case” and plugs in current-year EBITDA of $418m.

In the sunnier corner, broker CLSA says “the probability of further significant declines in iron-ore pricing and no improvement in ex-mining earnings is low in our view”. CLSA ascribes a 62c a share “price target”, while Credit Suisse downgrades its valuation from 62c to the rights price of 48c. We opt for a spec buy on the balance of probability that conditions would eventually improve, with the share price implying otherwise.

The Australian accepts no responsibility for stock recommendations. Readers should contact a licensed financial adviser. The author does not hold shares in the stocks mentioned."