OST

[josh92]

OST has broken the one year downtrend, shares up 1.5% today so far...
should be well supported.

entered on cfdreport.com entry level...

anyone else on OST here?

[Snoopy]

anyone else on OST here?

Yes, although it has taken me six years to admit it, and it seems no-one else will....

There is big interest on this forum in commodities. One commodity that doesn’t get discussed much is ‘good old steel’. I realize that a gold watch or even platinum enriched catalytic converter make for far more interesting cocktail party topics of conversation than a rusty old nail. Yet, ubiquity can beget an unctuous understanding that if ignored can deliver a blunderbuss blow to the commodity investor’s bank account. That means steel is worth studying.

Onesteel is an ASX listed company with a market capitalization of some $A2billion at what (surely?) must be the bottom of the business cycle.

Historically Onesteel has evolved from a spin off from BHP ten plus years ago (November 2000). Over the years Onesteel has absorbed substantial Australian steel market players ‘Email’ and ‘Smorgon Steel’.

Most recently (during FY2011) Onesteel has acquired a company called Moly–Cop. A company with business interests as far away as the Americas and Indonesia. Moly-Cop supplies grinding media to the mining industry. Onesteel has merged this company with their existing rope and grinding media business and created a new business segment for FY2011 ‘mining consumables’.

Onesteel has a corporate mission: to deliver superior sustainable returns through leading market positions in Construction, Resources and Industrial Markets predominantly in Australasia. So what does sustainable mean here?

SNOOPY

[Snoopy]

So what does sustainable mean here?

Sustainability is not something a steel company is commonly associated with. In this context sustainability means amongst other things, that Onesteel is self-sufficient in iron ore and scrap metal. These are the raw materials that Onesteel uses to manufacture its own long steel section product.

Onesteel’s blast furnace at Whyalla is most economic when steel prices are high, and the energy intensive cost of extraction from iron ore deposits, also owned by Onesteel, is relatively low. In addition the company owns three electric arc furnace plants, including the Sydney and Laverton Steel mills. These mills are most profitable when steel prices are low. Low steel prices mean scrap can be cheaply bought from the (also company owned) steel recovery businesses. Cast steel billets for further manufacture can be sourced from an adjustable weighted mix of iron ore and scrap metal raw material sources.

Manufactured long steel product (like pipe from Onesteel’s Australian Tube Mills) may be sold to third party distributors. But Onesteel has its own ‘in house’ Oz distributors too: Steel & Tube (Australia) and Metaland. These two retail industry chains take 70% of Onesteel’s manufactured output.

Onesteel, of all the worlds’ steel producers, must be one of the most herbaceous. ‘Hedging’ is there with steel input costs. And Onesteel owns a downstream supply chain, the largest in this market segment in Australia. Supply chain ownership reduces the squeeze on the manufacturing arm under the pressure of increasing input costs while the downstream market demands lower prices under import competition. In effect another hedge.

Separate companies within the Onesteel business portfolio can appear unprofitable at any one time. That’s often because all intersegment within Onesteel deals are done on an arms length basis. But it doesn’t diminish the hedging effects. Interconnectedness means it is the business’s overall position that is the most salient measuring stick for the Onesteel investor.

OK, sustainability is dealt with. What about 'leading market position'?

SNOOPY

[Snoopy]

What about 'leading market position'?

Leading market positions’ for Onesteel include:

1/ Construction (number one in reinforcing steel) ;
2/ Industrial markets (number one in general steel distribution in both Australia and New Zealand [via majority owned Steel & Tube], number one in wire)
3/ Recycling (number two in Australia)
4/ Niche markets (number one in steel sleepers and rail wheels) and strong position in Grinding Media acquired in Smorgon steel merger.

On paper Onesteel looks promising. So what does the five-year business picture look like?

SNOOPY

[Snoopy]

I have produced a graph that highlights what I consider as important indicators of the Onesteel business picture.

The top line shows earnings per share in terms of cents per share. EPS has bounced off the bottom for FY2011 but remains depressingly low in historical terms. Onesteel are not forecasting dramatic improvements for FY2012.

The solid section of the graph shows a return on equity investment target of 15% stacked up against the actual return on equity performance. 15% ROE is a demanding target, but not unattainable for this industry sector. Listed Onesteel subsidiary Steel & Tube has achieved this consistently for five years between FY2005 and FY2009 inclusive. But the thickness of the solid graph section shows that Onesteel is a long way from getting close. I have chosen the colour orange to represent this underperformance.

The final graph line represents margin, defined as normalized net profit divided by normalized revenues. Despite increasing the underlying sales base of the company the margin looks to be relentlessly grinding downwards.

SNOOPY

Attachment 3576

[Snoopy]

I have produced a graph that highlights what I consider as important indicators of the Onesteel business picture.

‘Gloomy’ is the word that comes to mind in viewing this picture. Perhaps Onesteel is not structured for the post global financial crisis era? I am frustrated in saying this because I know this company has the ability to perform (witness subsidiary Steel & Tube, despite a dip in FY2010 results), and is a strong market player. There are no obvious signs to me as to why the company is doing so badly. However living on the other side of the Tasman and reading only pro-company material in Onesteel annual reports may be colouring my view.

At this point I need to disclose my interest as a Onesteel shareholder, albeit in a very modest way. With recent market declines my total holding is only worth $A1k, when rounded to the nearest thousand. I had thoughts of building up an economically marketable parcel of shares. The contrarian in me says now is the time to buy. My ‘big picture’ shows me that buying now would likely be putting good money after bad. So I’m not buying more.

I would be very interested if those in the industry or those who follow it have insight into what has gone wrong with Onesteel. Looking at things from another perspective (as a former modest shareholder in Bluescope Steel which has seemingly fared much worse) perhaps I am looking at the Onesteel glass as half empty and that I should be counting myself lucky!

SNOOPY

[Corporate]

Anyone still following OST? The market has hammered the share price. I have done no research but see the latest annual report showing net assets of $4.5billion when the current market capitalisation is $1b. Worth a bit of a look over the weekend I think.

[drillfix]

Anyone still following OST? The market has hammered the share price.

Hi Corp,

Been a while since any posts on this thread so have been watching OST today and man , this trades like a beast.

My order just got missed at 84c and decided to not chase and would have loved to been on board today.

I can see the gap on this stock eventually getting filled at $1.20 over time, or close to 150EMA.

Anybody else following this after it has been smashed to a 52 week low of 63c ?

[macduffy]

Yes, drilly, I cast an occasional eye over OST, but clearly not often enough to catch the very recent upturn.

It seems that the market is finally catching on to the fact that OST, unlike the other BHP offshoot, Bluesteel, is now more a miner/mining consumables company than a purely steelmaker. Sure, steel is still a big part of the business with 47% of the assets and it continues to be unprofitable. But profits from the other divisions, particularly the iron ore mining and exporting, more than offset this and give OST a decent, if not spectacular underlying NPAT.

My interest in OST was sparked when they bid for and bought the iron ore interests of WPG in South Australia. I did nicely out of WPG but am a bit reluctant to give it all back by making an ill-judged foray into OST!

So I'll dig a bit deeper.

[drillfix]

Good Commentary there Macduff, thanks for that