OST: $1.72
Sector: Metals and mining
Business: Manufactures steel long products and distributes metals
Market cap: $932 million
Final dividend (June 30, 2002): 6.5 cents
Yield: 3.7 per cent
Price-earnings multiple (June 30, 02): 13.6 times
At January 17
Sure, Australia and the world still needed the steel products that roll off the line at its South Australian-based Whyalla steelworks, but there was nothing sexy about this stock.
Well, sexy or not, OneSteel has given investors a good run for their money in recent times. About 18 months ago - September 2001 - the share price was stuck below $1. In the following months it staged a rally, peaking at $1.83 on January 7. In the past 12 months the price rose 62 per cent from a low of $1.13 on January 15 last year.
The rising share price should not have been a surprise. BHP's steel arm had committed to a massive restructuring, huge staff cuts and improved productivity in the 1980s and 1990s, before headquarters decided steel did not make a comfortable fit with a global oil and minerals business.
OneSteel's board and senior management continued the reform process after the company was set adrift from BHP in late 2000, also acquiring some assets from a former blue-chip manufacturing stock, Email.
So once the market for OneSteel products picked up - partly as a consequence of the domestic housing boom - the results were quick to come, in the form of a $46 million profit for the year to June 30, 2002, a sharp improvement on the previous $24 million for 2001. (Note that the figure of $24 million slipped into the red when restructuring costs of more than $50 million were included.)
Today, the company is talking acquisitions and pursuing further efficiency gains. While some heat is expected to go out of the housing market, the outlook for the stock is still bright, with the company predicting a first-half profit to December 31, 2002, that will almost match the full-year result to June 30, 2002.
Certainly, the broking firm Deutsche Bank is optimistic about OneSteel's prospects. It agrees the first-half result for the 2003 financial year will be healthy and expects the full-year number to be a shade under $80 million. It says: "While the second half (of 2003) is not expected to be as strong as the first half, due to lower working days and planned maintenance shutdown, we have lifted our full-year profit for 2003 to reflect the likelihood of a better first half."
The broker adds that while management expressed caution in view of the drought and a slowing housing market, it is worth remembering that the two sectors account for only slightly more than 20 per cent of sales.
If Deutsche has its figures right, a $79 million profit in 2003 translates into a price-earnings multiple of 9.6 times. That's cheap when a predicted dividend yield of 6.3 per cent is added to the equation.
While the strong performance in the share price suggests investors should take profits, this column believes the fundamentals are attractive enough to keep holding the stock.
Bears
Village Roadshow (VRL, $1.32) SELL
David Pender, a private client research analyst with JB Were, says investors are concerned about Village Roadshow's capital allocation track record, its complicated ownership structure and the lack of transparency about its earnings and cashflow. "If the company continues to restructure its business such that transparency of earnings continues to improve , then our fundamental concerns are likely to reduce somewhat," he says.
Village Roadshow (VRL, $1.32) SELL
Peter Bolton, a private client adviser with Tolhurst Noall, says Village Roadshow has consistently failed to increase its profits over the years. "For the past decade it has gone from the promise of a high-growth company to that of a serial underperformer," he says. "From time to time investors rediscover their optimism and bid the price up when the company releases a popular movie, but I would view the recent strength in the share price as an opportunity to get out and into something more reliable."
Adsteam Marine (ADZ, $1.83) UNDERPERFORM
Gary Suckling, a financial consultant with Salomon Smith Barney Private, says that despite the sharp sell-off since last year's annual meeting, SSBP believes it is still too early to buy the stock. SSBP, which rates Adsteam a "high-risk" investment, has cut its profit forecasts for Adsteam by 29 per cent and 19 per cent in financial years 2003 and 2004, respectively. "We believe that there is a reasonable chance that restructuring costs may follow a review of the assets by the new chief executive," he says.
For disclosures about this company, visit www.ssbaccess.com.au
Bulls
QBE Insurance (QBE, $7.97) BUY
David Pender, a private client research analyst with JB Were, says QBE Insurance expects to write about $8.5 billion gross premium income this year. This represents an expected 15 per cent growth, in line with QBE's long-term target. "Given the evidence of strong premium rate increases being sustained into 2003, we have moved our forecasts up to QBE's target in 2003," he says, adding QBE remains the best prospect in the insurance sector.
Foodland (FOA, $17.10) BUY
Peter Bolton, a private client adviser with Tolhurst Noall, says that in the 12 months to June 2002, Foodland's shares doubled "and my advice was to sell. However, now that the price has dropped and analysts' expectations for profit growth are higher, I rate the shares a buy". He says since Foodland's purchase of stores from Franklins in Australia and Woolworths in New Zealand, its 2002 profit exceeded market expectations and the 2003 profit is expected to be 24 per cent higher, with a 15 per cent increase the year after.
Qantas (QAN, $3.90) OUTPERFORM
Gary Suckling, a financial consultant with Salomon Smith Barney Private, says SSBP believes Qantas is one of the best positioned airlines in the world. "We believe it should be trading closer to $5.20, which is about a market multiple of 14 times 2003 earnings," he says. He says this is because of Qantas' unique market position, quality management, the rationalisation of the Australian market and the possibility of it taking a stake in Air New Zealand. Mr Suckling says SSBP rates Qantas a "high-risk" investment.
For disclosures about this company, visit www.ssbaccess.com.au
Wildcard
Data & Commerce (DCL, $0.12) SELL
FOR much of the 1990s, Jeff Kennett dominated Victorian politics. Following his party's defeat by Labor in 1999, he was expected to transfer the same deft touch to the business world. But in the case of the broadcasting services group, Data & Commerce, where Mr Kennett was the star recruit for its talkback radio station 3AK, he has not delivered. First he failed to boost the station's ratings, then last November, he quit the board. Financially, it has cost Mr Kennett dearly. And it's been no better for other shareholders in Data & Commerce, which floated in 2000 at 40 cents a share. The results to June 30 last year were red ink to the tune of $11 million, and a plunging share price to match. A stock that briefly traded above 40 cents last March is now around 12 cents. Only supreme optimists could expect any massive revival in its fortunes. Sell.
