Forum Archive Index - October 2002

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

OK, it's crunch time.   Which is the better investment?  Our own 
Steel and Tube or the parent company OneSteel?

This decision is based on what I see as the long-term sustainable 
profitability of the two companies.  I have ignored the booms of the 
construction cycles (that inevitably go bust) and ignored all share 
price charts (others do those far better than I do).  This decision 
is based purely on 'base level business' fundamentals.  Any dividends 
that flow from construction booms are bonuses and not considered 
here.

The question I am asking is, given an expected base level of 
profitability, which is the best investment, OST at $A1.57 or STU 
$NZ3.10 (based on closing prices of 29th October)?   There are three 
aspects of each investment I would like to consider: income, capital 
appreciation and exchange rate risk.

1/ Income: (Sustainable yield) 
STU: 6.1% (after tax, taking into account imputation credits) 
OST: 6.5% or 4.3% (after New Zealand income tax due is removed) 

2/ Capital Appreciation: 
STU: 10% over 1 year (due to share buyback effect), with a nil 
increase over the following two years.  Steel and Tube is assumed to 
be currently trading at its efficient base level. 
OST: 25% over 3 years (due to operational improvements in 
distribution and tax).  Onesteel is assumed to be brought up to a 
good base level efficiency within 3 years. 

3/ Exchange Rate Risk: 
Traditionally the $NZ has fluctuated between 75c and 90c Australian 
over the last few years.  At 87c one might conclude that now is the 
time to invest funds in Australia.   However, it is dangerous to 
assume such fluctuations will continue in the future, in particular 
now that NZs Reserve Bank has resolved to mimic the Australian 
Reserve Bank more closely.  Conclusion: Neutral

Summary:  We are projecting a total after tax return from Steel and 
Tube of 10%+6.1%=16.1% for one year or [(3x6.1%)+(10.1%]/3= 9.4%pa 
over 3 years.  For OneSteel we are projecting earnings of 
12.5%+4.3%x0.9= 16.4% over one year or [(3x4.3%)+25%]/3= 12.6%pa over 
3 years.

This is really a choice that is too close to call in 2002 as I see 
it.  The result depends on how quickly the benefits of the improving 
business at OST is recognised by the market.

However, I do see that, in the medium term, OST is the better 
investment choice because it is not as far down the restructuring 
path.  It would be hard to argue against watching the STU share price 
to see if it gets overheated during the announced buyback over the 
next few months.  Then if it does, making the switch into OST.  
People who make such a switch will not be deserting Steel and Tube of 
course, as OneSteel owns 50% of it and has no plans to sell out.

SNOOPY


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Message sent by Snoopy 
e-mail  tennyson@caverock.net.nz
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"Stay on the upside of the downside, 
Anticipate the anticipation!"



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