MAYBE it's all the festive cheer that is getting to Insider. But after a long year, it might be time to take a closer look at the merits of some battered stocks.
The retail shareholder response to steel producer BlueScope Steel's $600 million capital raising was predictably underwhelming, with less than half 310 million out of 649 million of the shares on offer taken up at the 40? offer price. Understandable when you look at the year BlueScope and the Australian steel industry have endured. And yet, it could have been much worse.
Underwriter Credit Suisse was no doubt getting twitchy when the share price was hovering at 38? for much of the offer period.
But Insider also understands that some of the smart money, including hedge funds that have shorted the stock for most of its journey down, may be thinking the company's share price has finally hit the bottom after about an 80 per cent fall from the start of the year. The argument stems from supply constraints overseas, which have left analysts much more confident about steel prices in the medium term.
But even with a fixed balance sheet, is BlueScope a value story? Put simply, hitting the bottom is not necessarily the same as saying a company is on its way back up.
The uncertainty of the structural overhaul being experienced by the company would suggest better value could be had elsewhere.
Nonetheless, the company late yesterday was spreading the word around the market that the book-build, for the shares not taken up under the retail component of the entitlement offer, was "well covered" at 40?, even before going to offshore institutional buyers overnight.
Last Friday, it also welcomed $100 million in government assistance payments as an important step in paying down debt also the main motivation for the equity raising. But the receipt of government handouts serves to underscore the grim reality the company is trading in.
As chief executive Paul O'Malley (left) pointed out when announcing the $600 million raising last month: "Earnings continue to be impacted by the ongoing environment of a high Australian dollar, low steel prices, high raw material costs and softer demand conditions in Australia."
Shares in BlueScope will remain in a trading halt until Monday unless the outcome of the book-build is known earlier.
Leighton looking up
ANOTHER large company that has endured a horror year is Leighton Holdings, with the contractor struggling to regain its credibility after a range of profit downgrades on key problem contracts, and David Stewart dumped as chief executive just eight months after taking over from the long-serving Wal King.
It is early days yet, but Stewart's replacement, Hamish Tyrwhitt, appears to be winning over some sceptics.
Nomura analyst Simon Thackray was one of the first to put a sell on Leighton late last year when it was trading at $33.
Now with the stock struggling to break $20, the Nomura analyst has put a buy call on the stock.
"We see 2011 as the turning point for the group risks are abating, quality is rising and margins can improve consistently as profitless work rolls away," he said in a recent note.
The company's pitch remains that it is exposed to all the right geographic areas and in the right sectors.
It reported $6.4 billion in revenue for the September quarter, making its full-year target of $20 billion look conservative, particularly on the back of strong contract wins in recent weeks.
The key thing will be whether it has learnt from its mistakes. The group's push into India could prove lucrative, provided it doesn't turn into a repeat of its Middle Eastern woes.
Group revenues will likely hit fresh record highs, but as Tyrwhitt himself has lamented before, 400-plus profitable contracts count for little if just two or three big ones go spectacularly astray.
Setback for Brierley
THE fund backed by Ron Brierley, India Equities, has had its tilt for the Asset Backed Yield Trust of Adelaide Managed Funds scuppered after the stock exchange knocked back its request to postpone the delisting of AYT yesterday.
Gabriel Radzyminski of India Equities told Insider the fund had only managed to acquire a "negligible" amount of AYT units through its short-lived on-market bid, and expressed disappointment that unitholders were not given ample opportunity to consider their offer.
pwen@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
What happened with BlueScope Steel's $600 million capital raising and why did retail investors largely sit it out?
BlueScope launched a $600 million entitlement offer but retail demand was underwhelming — less than half of the retail component was taken up (about 310 million of 649 million shares on offer at the offer price). The weak response reflected a tough year for BlueScope and the wider Australian steel sector, heavy falls in the share price through the year and ongoing market uncertainty about steel prices and demand.
Does BlueScope’s share price falling about 80% mean it’s now a value buy for everyday investors?
A steep fall can attract bargain hunters, and some hedge funds think the share price may have hit a bottom after roughly an 80% drop from the start of the year. But the article warns that bottoming isn’t the same as a clear recovery — structural change at the company and ongoing headwinds mean there’s still uncertainty, so it may not be an obvious value pick for every investor.
How did the underwriter and book‑build process affect BlueScope’s equity raising?
Underwriter Credit Suisse was reported to be nervous when the share price hovered below the offer level during the offer period. BlueScope later said the institutional book‑build for the shares not taken up by retail was “well covered” at the offer price, even before going to offshore institutional buyers. The share register remained in a trading halt until the book‑build outcome was known.
What role did government assistance play in BlueScope’s plans?
BlueScope received $100 million in government assistance, which the company welcomed as an important step toward paying down debt. The article notes the assistance underscores how difficult trading conditions have been and that reducing debt was a main motivation behind the equity raising.
What did CEO Paul O’Malley say are the main pressures on BlueScope’s earnings?
Paul O’Malley said earnings were being hit by a combination of a high Australian dollar, low steel prices, high raw material costs and softer demand conditions in Australia — factors that have weighed on the company’s performance.
Why are some analysts becoming more positive on Leighton Holdings after a difficult year?
Leighton endured a tough year with profit downgrades and a change of CEO, but its new chief executive, Hamish Tyrwhitt, appears to be calming sceptics. Nomura’s Simon Thackray moved from a sell recommendation to a buy, arguing 2011 could be a turning point as group risks abate, quality improves and margins recover as loss‑making contracts roll off. The company also reported solid revenue (about $6.4 billion in the September quarter), supporting its growth case.
What risks should investors watch with Leighton Holdings despite the improving outlook?
The article highlights that even if revenues rise, a small number of big problem contracts can undo progress — Leighton’s past issues in the Middle East are a cautionary example. Expansion into markets like India could be lucrative but carries execution risk, and investors should watch contract quality and whether management has truly learned from past mistakes.
What happened with Ron Brierley’s India Equities bid for Asset Backed Yield Trust (AYT)?
The stock exchange rejected India Equities’ request to postpone the delisting of AYT, derailing the fund’s plan. India Equities (backed by Ron Brierley) said it had only acquired a negligible amount of AYT units through its on‑market bid and expressed disappointment that unitholders did not have more time or opportunity to consider the offer.
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