macquare report - $4.10 price target

here's the link:

http://macq.wir.jp/e.ut?e=wf4sMHVbrMZXK9x3HnNYfS9Sptw

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OneSteel

Loading up on mining consumables

Event

* OST has signed an agreement to acquire the Moly-Cop and AltaSteel businesses from Anglo American plc (AAL LN, 30.12, Outperform, TP: 34.50, Kieran Daly ) for an EV of US$932m.

* The acquisition will be debt funded in US$ and is expected to close at the end of CY 2010 (still subject to regulatory approval). The acquisition of economic interest is effective 1 July 2010 for OST.

Impact

* The US$932m purchase price implies an FY10E EV/EBITDA multiple of 9.3x. While OST is arguably acquiring the businesses at close to the bottom of the cycle and there will be translation benefits on any 'normalised' level for the A$, this does appear to be a reasonably high multiple (OST is currently trading on an FY11E EV/EBITDA multiple of closer to 6x).

* OST expect the transaction to be EPS accretive immediately (pre-transaction costs) with mid-single digit accretion in FY12. We expect FY11 to benefit from 12 months of earnings and only 6-7 months of interest expense, while FY12 will more appropriately reflect a full 12 months worth of both earnings and interest for OST. In terms of the balance sheet, we expect OST's gearing (ND/E) to move up to circa 42% after the transaction, versus 21% at present.

* Further detail on the acquired businesses. Moly-Cop is a leading producer of forged steel grinding balls with production facilities in Chile, Peru, Mexico and Canada which supply the mining industry. Altasteel has a fully integrated steel mini-mill in Canada supplying ballstock for the production of forged grinding balls to Moly-Cop and heat treated grinding rod to the America's mining industry. The deal also includes a 40% shareholding in the Australian grinding media producer, Donhad.

* An extension of OST's existing grinding media operations and a platform for further growth. OST appear keen to grow their position in mining consumables and the acquisition of Anglo's assets will enable the business to leverage existing core capabilities to new geographies. The acquisitions will increase OST's exposure to the mining industry (particularly copper and gold) in high growth regions. The transaction will also see OST diversify its earnings away from the Australian construction and infrastructure cycles, and will provide a platform for further potential growth in this space.

Earnings and target price revision

* No change.

Price catalyst

* 12-month price target: A$ 4.10 based on a DCF methodology.

* Catalyst: 1H11 result in February 2011.

Action and recommendation

* Outperform retained. We are in the process of undertaking a further review on OST post a recent change in analyst.