Forum Archive Index - July 2003
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[sharechat] Investing In Steel - July Update
In May I wrote:
"BSL is only able to buy back 10 million shares before July 12th. If
BSL completes the buyback of 10 million shares before that date, and
there is an associated lull in the buy back, then the (BSL) share price
may slip bringing down the price of OST with it. Somewhere around
late June and early July is where I believe, fellow investors, we may
just get our best opportunity to become an OST shareholder."
Sad news folks. It didn't happen. The 'BHP Steel' (BSL) share
buyback has been carefully spun out. This means that there will be
no hiatus in the buyback, and no consequent drop in share price,
either of BSL or by loose association OST ('Onesteel').
The latest comparative share price behaviour between BSL and OST
is interesting. They remained virtually locked together until the last
week in June when OST appeared to hit the wall at $1.95, but the BSL
share price continued to go higher. Unexpectedly this share price
climb by BSL is happening at a time when the proxy indicator price for
hot rolled steel product is dropping (down 3% in USD terms, while the
AUD to USD exchange rate remained unchanged). I can't see a
press release that would account for this BSL price action. So what
can explain it?
BSL has just this month opened a new steel plant at Lyndhurst
Melbourne, cementing the company's low cost base position ( only
10% of worldwide steel producers are better). So BSL is having a
month in the wider media, which might attract some associated buying
Furthermore the branded sheet steel products of "Zincallume"(coated)
and "Colourbond"(painted) are continuing to be well received in
Australia and Asia. Perhaps BSL is on the way to partially break its
reputation as a simple manufacturer of commodities? With no sign of
the Australian property bubble bursting, BSL's year just keeps on
Bearing in mind the one off 14% tax rate that applied to the first half
year results, I doubt that we will see BSL repeat this 2003-2004
premium performance in FY2004-2005.
Internationally, China is continuing plans to expand their steel
production capacity by 30% over three years. Demand for steel in
China is increasing, but there is doubt that internal demand can
continue to grow at a rate to match the increased production capacity.
On the positive side, steel industry consolidation is continuing
throughout the rest of the world, but China is a mind to itself and may
upset the 'volume of available steel' apple cart.
Long term I am projecting eps of 34c for BSL over the business cycle,
which will rise to 37c if the BSL buyback is completed as planned. If
60% of earnings are paid out (as is BSL policy) this means a
sustainable dividend yield of 22/395= 5.6% (based on a share price of
$3.95). Given that it looks like this can be sustained over five years,
and the payout may be even higher this year, that is quite an attractive
rate of return for the Australian investor. Particularly if BSL can
maintain full dividend franking credits, as is now looking likely. I can
quite understand why income starved Australian investors are diving
into BSL shares to take full advantage of that payout, as bank interest
rates head lower.
Before the BSL buyback started, there were 790m shares on issue
verses 540m OST shares. All things being equal, you might expect
the BSL share turnover to be 46% higher than for OST, to reflect the
greater number of shares on issue. According to the volume chart
attached, there are days when the BSL volume considerably exceeds
this figure. I present that as evidence that the continuing buyback
will support any upward BSL share price appreciation momentum.
As a New Zealand investor BSL doesn't make as much sense. NZers
have to pay tax on that 5.6% dividend return. There are many high
yielding shares on the NZ market that will give you an income much
better than that.
Turning attention now to Onesteel, I am projecting the return over the
three financial years 2003-2005 to be made up of dividends and
capital appreciation as below:
OST: (8.5(.66)+9.5+9.5) + (196-190)= 30.6c
This represents a return of around 5.4% per annum. That's a fair
return for a good company. But from an investor 's point of view at
$1.90, I think there are better opportunities out there. In baseball, you
don't have to swing at every pitch. For potential OST investors, I think
it is time to keep your bat to the shoulder.
Both BSL and OST are Australian shares, so it is a fair assumption that
'short term' the share price movement will be driven by the psychology
of Australians. That means that as long as interest rates remain low,
it looks like we can expect the BSL share price to consolidate at just
under the $4 mark. But looking 18 months to two years out, as the
mobile data entry stock control program is rolled out across the OST
group (improving stock management), I believe it is OST that will be
the better performing share of the two.
discl: No significant holding in OST, and none in BSL
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