Limited Upside From OneSteel’s New Zealand Move

This story features BLUESCOPE STEEL LIMITED, and other companies. For more info SHARE ANALYSIS: BSL

The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

Australian steel group OneSteel ((OST)) continues to enjoy something of a windfall courtesy of its iron ore operations, which are generating significant excess cash flows and allowing the company to consider expansion opportunities. The first of these is a bid to mop up the 49.7% of Steel & Tube Holdings in New Zealand the company doesn’t already own, but there are divergent views in the market as to the merits of the move.

According to UBS the acquisition should be slightly earnings accretive, Credit Suisse suggests the deal will also provide some regional diversification and so is a reasonable move. It is not expected to have much of an impact in terms of earnings though, as brokers have largely left their estimates unchanged on the news.

In Merrill Lynch’s view there is also little strategic benefit from the acquisition, as expanding its scale in New Zealand at present only makes sense if it is the precursor to further overseas expansion. Having said that, the broker doesn’t see the decision as a platform for such a wider objective.

What it does indicate is the company is prepared to invest its excess iron ore revenues back into the steel industry, but here the broker’s issue is the stock is expensive compared to a similar exposure obtained via investing in a combination of BlueScope Steel ((BSL)) and iron ore play Mt Gibson ((MGX)).

UBS agrees and notes on its numbers the stock, while at a discount to its historical multiple at present, remains at a premium to its global peers. When combined with the fact global steel prices are falling at present, the broker sees little chance for outperformance in the stock and so retains its Neutral rating.

Others are more optimistic, Deutsche Bank raties the stock as a Buy having previously indicated there was upside risk to the company’s earnings from its iron ore operations, as reserves and volumes may both be upgraded going forward.

Similarly Macquarie had lifted its earnings estimates for the company post the recent profit result on the prospect of stronger iron ore earnings, so the broker has made no change to its Buy rating. But again Merrill Lynch argues these are more volatile than steel earnings and pricing in this risk means a Neutral rating is justified at present.

Overall, the FNArena database shows a total of six Buys and four Hold ratings on the stock, with an average price target of $7.99. This is down from $8.23 prior to the announcement of the bid for the balance of Steel & Tube on the back of ABN Amro cutting its price target to $7.35 from $8.50 to reflect current negative sentiment towards the resource sector.

Today, shares in OneSteel are weaker in line with the overall market and as at 12.05pm the stock was down 36c or 7.3% at $4.56. This compares to a trading range over the past 12 months of $4.46 to $7.88.

Click to view our Glossary of Financial Terms