From the Australian http://www.theaustralian.com.au/business/opinion/one-more-chance-for-colourless-blue-chip/story-e6frg9lo-1226080202996
WITH the market coming off the mat after being KO'd by the Greeks, it's worth sniffing for oversold plays -- and there's been no blue chip more trashed than the steelmaker.
BlueScope Steel (BSL) $1.17
BlueScope is being valued at salvage rates: according to Macquarie Equities, there's nil value ascribed to its local operations, centred on the Port Kembla works.
JPMorgan notes that the stock is trading at 0.39 times book value and 0.47 times net tangible assets.
If the steel cycle turns, BlueScope is worth much, much more: JP Morgan devises a "base case" of $3.56 a share and Deutsche Bank assigns a $2.60 "target price". But what if the cycle doesn't turn?
There's a real fear the company could breach a lender's condition that the ratio of EBITDA to net interest obligations doesn't fall below 2.5-3 times.
JPMorgan reckons that on expected 2010-11 EBITDA of $253 million, there's plenty of headroom (and BlueScope's gearing is actually modest after capital raisings in 2008 and 2009).
Hmmm. Sorry to sound like Wayne the Worrier, but what if Port Kembla continues to make losses and has to be closed?
The short answer is that with a rehab bill of between $1 billion and $1.5bn, it's unlikely. But even if steel Armageddon happened, JPMorgan estimates a "floor case" of 80c a share.
Criterion has posted a succession of dud spec buy calls on BlueScope, the last at $1.86 on March 11.
Like the feckless parent to a wayward son, we'll give them one more chance.
We suspect BlueScope will be taken over (or merge with OneSteel) well before it's in danger of going broke.
OST Price at posting:
$2.05 Sentiment: None Disclosure: Held
