Forum Archive Index - July 2003

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

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 
attention.

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 
keeping 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.

SNOOPY

discl:   No significant holding in OST, and none in BSL


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