The reporting season is looking a bit like a damp squib; not much fizz to be seen. Although there have been exceptions, such as mineral exploration service provider Boart Longyear, which had operating revenue up 36.9% and double digit growth forecast. In the ailing manufacturing sector there has been the predictable travails. Bluescope’s headline net loss worsened from $49.2m in 1H11 to $523.7m in 1H12. OneSteel’s result was roughly in line with expectations but Deutsche is expressing caution about the debt:
We forecast OneSteel FY12 net debt/equity of 51% and EBIT/interest cover of 2.4x. Should iron ore prices fall from here, we believe OneSteel’s balance sheet could be challenged – particularly given the $475m capex spend in FY12. Due to uncertainty, management provided no FY12 NPAT guidance – as a result of this uncertainty, we were surprised the Board elected to pay an interim dividend.
Little wonder. Onesteel may have persuaded a few punters that it’s a mining stock with its mooted name change but it still carries the legacy steel assets exposed to an ongoing downturn in housing construction, as well as an increasing downdraft in iron ore prices this year as China shakes out. Deutsche sees the rally in the stock as well over done and as a short squeeze:
We believe the large increase in the share price [yesterday and today] may have related to the significant short positions in the stock, which have doubled since the start of 2012. Deutsche values the stock .84, which is a long way below where it is trading today. They continue with their hold recommendation.
Deutsche also notes that OST has significant currency risk in which every 1 cent move represents $10 million in EBIT and estimates that this could knock $25 million from 2HFY12. It also sees a real risk of write downs in both the legacy assets and distribution divisions which could increase net debt to equity levels from 51% to 92%. And seriously concern the firm’s creditors.
What’s in a name for Onesteel? A lot, it seems, when the name you utter is the magic word: mining.