Like Promina and Suncorp-Metway OneSteel’s latest results are interesting in a historical sense but it’s the immediate future that holds the key to the company’s progress and profitability because of the dramatic changes that about to happen.
Promina and SUN are moving towards merger; so is OST which has also the huge revamp of part of its operations in South Australia about to bear fruit.
So its the next one to two years that are going to be vital for OST and its shareholders.
But it’s doing well at the moment. OneSteel posted a 16.8 per cent increase in first half net profit to $98.2 million and says trading conditions are in line with its expectations.
The latest result compares to the $84.1 million comparable profit of the corresponding first half of the 2006 year. The latest results represents a 15.4 per cent increase in earnings per share from 14.9c to 17.2c and a lift in the interim payout from 7c to 8c (fully franked), or a payout ratio of 47%.
The company is obviously keeping payout low because of the continuing cost of the huge Project Magnet revamp and the impending $1 billion cost of the deal with Smorgon Steel
Commenting on the result, directors said “The mining and resources segments are driving domestic activity, along with solid nonresidential and engineering construction markets,” it said. “These continue to offset softness in the manufacturing, automotive and residential and drought affected rural segments.”
OneSteel said international prices for steel and key inputs, such as scrap and hot rolled coil, are expected to remain fluid and that in light of recent iron ore price settlements, the medium-term outlook for iron ore prices continues to be positive.
OST said it was comfortable with the current market outlook for its full year net profit with analysts expecting a net profit of about $195 million for the year to June.
The interim figure however was a little under some analyst forecasts who were looking for something more than $100 million on an after tax basis.
The shares were a little easier, finishing around $5.20, off five cents or so.
OST shares have risen 40c or so in the past fortnight or so after the deal with Smorgon Steel was settled.
The new deal involves OneSteel acquiring all of the assets and abilities of Smorgon Steel except Smorgon Steel’s steel and metals distribution businesses, and assuming effectively all of Smorgon Steel’s debt, in return for the issue of new OneSteel shares to Smorgon Steel, and the distribution of those OneSteel shares to Smorgon Steel shareholders. The cost, around $1 billion.
As part of the deal to try and win ACCC approval there will be a joint venture in the structural pipe and tube area.
Smorgon will remain a listed company with the distribution business. BlueScope Steel will hold around 20 per cent of Smorgon and about five per cent of OST if the deal concludes satisfactorily.
This deal, if it wins approval from the ACCC and favourable tax rulings, and from the respective shareholders, should be completed by mid-year.
OST has also got the huge Project Magnet to start kicking in its benefits from later this year with iron ore exports and increased efficiencies at Whyalla and at its South Australian iron ore mines.
“Project Magnet capital construction work is due to be substantially completed in the 2006/07 financial year, with around $310 million spent as at 31 December 2006.
“The total cost of the project was previously forecast at $355 million plus an additional 5%. However, with continued cost pressures and the recent flood at Whyalla, the current estimate is $385 million or approximately 8% over budget. Of the remaining $75 million to be spent, $45 million, or 60%, was committed as at 31December 2006, providing us with a high level of confidence.”
While the rise in costs will create a niggle or two, they have been flagged, so no real surprises and the intended benefits, plus those from the SSX deal, should see a substantial boost in earnings in the 2008 year and beyond, all things being equal.
