1

2010 ANNUAL REPORT
FY10 Business Highlights
• Bisalloy Steel Group (“the Group”) delivers FY10 EBITDA of
$5.7 million (before FX losses), which is in upper range of market
guidance.
• FY10 result impacted by significantly weaker market conditions
which prevailed throughout calendar year 2009, with a gradual
improvement in trading conditions and increasing opportunities
from the beginning of the 2010 calendar year.
• Group borrowings reduced to $18.1 million at 30 June 2010, down
from $36.2 million at 30 June 2009, driven by improvements in
working capital and a $4.9 million equity raising in August 2009.
• The finance facility was renewed through to October 2012.
• The Group expects the improvement in quench and tempered
steel market conditions experienced during the second half of
FY10 will continue into FY11.
FY10 H2 FY10 H1 FY09 H2 FY09 H1
-5
0
10
15
20
$m
17.5
(-0.4)
0.0
5.7
5
43.6
34.5
24.7
18.1
June 10 Dec 09 June 09 Dec 08
0
10
30
40
50
$m
20
EBITDA before FX Borrowings
Company Valuation Report
September 30 2010
Valuation Summary! 5
1. Company Analysis! 7
1.1 Overview! 7
1.2 History! 7
1.3 Share Price Performance! 8
1.4 Company Structure! 9
1.5 Products & Facilities! 10
1.6 Customer Segmentation! 11
1.7 Corporate Strategy and Objectives! 12
1.8 Sources of Competitive Advantage! 12
1.9 Ownership Structure! 13
1.10 Capital Structure! 14
1.11 Senior Management! 15
2. The Economic Environment! 16
2.1 Overview! 16
2.2 Macroeconomic Indicators! 16
Terms of trade! 16
Inflation & Metal Commodity Prices! 17
Interest Rates! 18
Exchange Rates! 18
2.3 Economic Outlook! 19
Cyclical Properties of the Stock Market! 19
3. The Asia-Pacific Steel Industry! 21
3.1 Overview! 21
Market segmentation! 21
3.2 Key Competitors! 22
3.3 Porterʼs Analysis! 23
3.4 Industry Outlook! 24
3.5 Short-Term Industry Growth Projections! 26
4. Financial Statement & Company Risk Analysis! 28
4.1 Bisalloy Peer Group Overview! 28
2
4.2 Extended Dupont Return on Equity! 29
4.2.1 Operating Profit Margin! 31
4.2.3 Total Asset Turnover! 31
4.2.3 Return on Assets! 32
4.2.4 Interest Expense Rate! 32
4.2.5 Net Before Tax/ Total Assets! 32
4.2.7 Net Before Tax / Common Equity! 33
4.2.9 Return on Equity (ROE)*! 34
4.3 Business Risk! 35
Sales Variability & Operating Leverage! 35
4.3 Financial Risk! 36
5. Future Earnings for Bisalloy! 39
5.1 Factors Affecting Earnings! 39
5.2 Bisalloy Earnings Forecast! 42
5.2.1 Implied Long-Term Growth! 42
5.2.2 Short to Medium-Term Growth! 43
Valuation Assumptions! 45
6.1 The Required Rate of Return (r)! 45
6.1.1 Beta (β) Estimation! 45
6.1.2 CAPM Calculation! 48
6.1.3 Sensitivity Analysis for RRR! 48
7. Company Valuation! 50
7.1 The Present Value of Dividends Model! 50
7.1.1 Estimating the Dividend Growth Rate! 50
7.1.2 DDM Sensitivity Analysis! 52
7.2 Present Value of Free Cash Flow to Equity! 53
7.2.1 Estimating the FCFE Growth Rate! 54
7.2.1 Sensitivity Analysis! 55
7.3 Price/Earnings Ratio Model (P/E)! 56
7.3 Estimating P/E & EPS! 57
7.4 Price/Book Value Ratio! 59
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7.4.1 Historical Peer Comparison! 59
7.4.2 Calculating the P/BV Ratio! 60
7.4 Net Tangible Assets Backing Model! 61
Discussion! 64
8.1 Dividend Discount Model (DDM)! 64
8.2 Free Cash Flow to Equity Model! 64
8.3 Price Earnings Ratio Model! 65
8.4 Price/Book Value Ratio! 66
8.5 Net Tangible Asset Backing! 66
8.6 Preferred Valuation Method! 67
9. Conclusion & Recommendation! 67
9.1 To Buy or Sell?! 67
10. References! 69
Appendices! 72
Appendix 1: DuPont ROE Inputs! 72
Appendix 2: Excel Regression Output- Steel Production & Sales Growth! 72
Appendix 3: Excel Regression Output- Beta Calculation! 73
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Valuation Summary
This report examines the fair market value per share of Bisalloy Steel Group Ltd (BIS). The company was
first listed on the Australian Stock Exchange (ASX) in 2003, then trading under the name Atlas Group
Holdings Ltd.
The purpose of this valuation is to assess the prevailing market value of Bisalloy stock as at 30 September
2010. The premise of the valuation is that the company is valued as an ongoing concern, as opposed to a
liquidation basis of value. Valuation methodology involved gathering, analysing and adjusting relevant
information in order obtain variables that could be used to perform a forward-looking valuation. Five different
valuation techniques were employed; Dividend Discount Model (DDM); Free Cash Flow to Equity (FCFE);
Price Earnings Ratio (P/E); Price to Book Value Ratio (P/BV) and Net Tangible Asset Backing (NTAB). The
results of all valuation methods were consolidated to provide an informed opinion as to the intrinsic value of
the Bisalloy stock on which a buy or sell decision can be made.
Bisalloy is an Australian based manufacturer of quenched and tempered steel plate that they brand as
Bisplate. The companyʼs manufacturing operations are located in NSW, Australia but they have established
distribution channels in overseas markets, primarily within the Asia-Pacific region via the joint venture with
PT Bima Bisalloy (Indonesia) and Bisalloy Thailand. The majority of operating revenue comes from the
mining, transport and military industry sectors. The company has undergone significant change and
restructure since the sale of the Atlas distribution business in November 2008, which subsequently led to a
sharp decline in the value of company stock. However, the divestment has improved Bisalloyʼs future
earnings prospects, which have been previously limited by the poor performance of the distribution business
segment.
Research concerning the macroeconomic, industry and internal conditions of the company look favourably
upon a return to positive earnings growth in the 2010-11 financial year with a range of factors supporting
investment appeal:

Bisalloy appears well placed to take advantage of investment in steel products that will underpin the
modernisation of Asia, in particular China and India. This will be facilitated via major customer
Caterpillar, Indonesian and Thai joint ventures and the prospect of a Chinese joint venture on the
horizon.

The company has established a competitive advantage with the intellectual property surrounding its
steel template products, and as barriers to entry are high in the steel industry, there is reduced risk that
this competitive advantage will be lost. Furthermore, the launch of an extended product mix will
provide diversification benefits and lower sales variability via exposure to different markets.

The outlook for the Australian steel industry is very optimistic, as a function of economic expansion
post-GFC. Short-term growth projections are further enhanced by the effects of government stimulus
into steel intensive industry and inventory rebuilding. For this reason, Bisalloyʼs leverage to the mining
industry will be an important factor of revenue growth.

The company has recently reduced debt capital to a reasonable level and adequate working capital to
allow for growth. Reasonable capital provisions are considered more important in todayʼs business
environment after the lessons of the GFC.
Of course there are a number of risk factors to this optimistic earnings forecast; economic slowdown in
China; unknown effect of the withdrawal of fiscal and monetary stimulus and record high prices for steel raw
inputs like iron ore. However, such risk has been factored into valuation calculations by use of a discount
rate of 13.35%, based on an adjusted beta of 1.284 which provides Bisalloy carries greater systematic risk
relative to the market. It is on the basis of the information gathered above that variables required for
computation of each valuation model were estimated. Variable assumptions were made for the following; the
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required rate of return, beta, dividend payout ratio, DDM growth rate, FCFE growth rate and return on equity
(ROE).
As expected, the results from the different valuation models were mixed, as shown in Figure A below.
Analysis of each model and the associated variable inputs led to the conclusion that FCFE model is the most
relevant for valuing Bisalloyʼs stock. However, by weighing the results of each model, there was found to be
higher probability that the market had moderately undervalued Bisalloyʼs stock relative to the market share
price of $0.18 as at 30 September 2010. In conjunction with qualitative information regarding the earnings
potential for the company, we make a buy recommendation and price target of $0.21. However ultimately the
decision will come down to the individual investorʼs utility.
Figure A: Bisalloy Valuation Summary ($ As at 30 September 2010)
Our valuation results confirm that the market does not always get it right. In fact, for firms like Bisalloy with
relatively small market capitalisation you would almost expect that Bisalloyʼs stock would be undervalued by
the market. Share analysts tend to focus on the earnings potential of larger firms, and for this reason it is
very possible that the earnings potential of Bisalloy has yet to be realised by the market, especially when we
consider the uncertainty among investors about the future of Bisalloy after the divestment of Atlas distribution
and that Bisalloy has yet to establish strong earnings growth. Of course only time will tell whether our
valuation is appropriate, but we confidently stand by our conclusions.
0
0.125
0.25
0.375
0.5
DDM FCFE P/E P/BV NTAB Market Share Price
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1. Company Analysis
Bisalloy Steel Group ASX Listing details*
Issuer Code BIS
Official Listing Date 23 June, 2003
GICS Industry Group Capital Goods
Exempt Foreign No
Internet Address http://www.bisalloy.com.au
Registered Office Address 18 Resolution Drive, UNANDERRA, NSW, AUSTRALIA, 2526
Current Share Price $0.17 (as of COB 3/09/2010)
*Source: Australian Security Exchange (ASX) 2010
1.1 Overview
Bisalloy Steel Group Limited (Bisalloy) is an Australian based and ASX listed company. It engages in the
manufacture and sale of quenched and tempered (Q&T) steel plates under the ʻBisplateʼ brand name.
Bisalloy has positioned itself as the only Australian manufacturer of high-tensile and abrasion-resistant Q&T
steel plate, with 55% share of the Australian market.
Bisalloy is headquartered in Unanderra, NSW, Australia. The company is formerly known as Atlas Group
Holdings Limited and changed its name to Bisalloy Steel Group Limited in November 2008 after divesting its
distribution subsidiary (Atlas Distribution). Bisalloyʼs primary customers are located in Australia, South East
Asia, South America and the Middle East, where the majority of distribution is in the Asia-Pacific region.
The companyʼs products include wear plates that are used for mining applications, such as dump trucks and
dragline buckets; structural plates for applications, including booms on cranes and other light weight/high
strength applications; and armour plates for applications comprising armoured personnel carriers. It sells its
products through a network of distributors, joint venture businesses, and agents in Australia and
internationally. Bisalloy services the mining, transport, military, general engineering, and agriculture sectors.
1.2 History
Bisalloy was initially founded (under company name Bunge Industrial Steels) in 1980. It is a successor of
Atlas Group Holdings Limited (Atlas), which was established in 2001 after leveraged management buy-out of
Atlas Distribution, Atlas Manufacturing and Bisalloy Steels from Email Limited.
Atlas operated as a processor and distributor of specialty metal products in Australia and New Zealand.
Products included processed stainless steel, engineering steel, quenched and tempered steel plate, carbon
tube pipe and fittings and aluminium flat rolled products. In 2003, Atlas created a joint distribution venture in
Thailand, and in the same year was also floated on the ASX with an IPO of 65 million shares at $1.10 a
share, giving it a market capitalisation of $90 million (B Frith, 2008).
Over the next several years Atlas acquired a number of specialty metal distribution businesses and a 50%
share in a Arcelor Stainless International coil and polishing processing centre. In 2006, after appointment of
new CFO, Atlas commenced the restructuring of the Atlas Distribution business, including redefining their
business portfolio, establishment of a centralised supply chain model, reconfiguration of the Australia and
New Zealand distribution network, and restructuring of the New Zealand distribution business and project
services.
Part of this restructure involved the establishment of new agreements with suppliers in China and Japan, for
the raw plate material used by Bisalloy Steels. The intention of the new sourcing strategy was to diversify
Bisalloyʼs raw material supplier base. Also in the 2007-08 period, Atlas completed commissioning of second
shot blaster and installation of robotic vehicle at their Unanderra facility, significantly increasing production
capacity of Bisalloy Steels and eliminating bottlenecks in production.
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In September 2007 Atlas received an offer from major shareholder Balron Nominees Pty Limited, to acquire
all of Atlas Groupʼs outstanding shares at $1.00 per share. The offer was rejected by the Atlasʼ board
because they believed the offer to be inadequate, based on the fact that Atlas was trading close to $1.00 per
share at the time of the offer, and the premium offered by Balron was not sufficient.
However, under pressure from poor profitability and ballooning debt, the company accepted an offer for $75
million for the Atlas distribution business in the second half of 2008 from Balron Nominees Pty Ltd and
entities associated with Greenstone Partners Private Capital. The sale enabled Atlas to reduce debt and
interest costs. This deal has also increased the likelihood of a takeover offer for the Group. Following the
sale, Atlas Group Holdings Limited was renamed Bisalloy Steel Group Limited.
1.3 Share Price Performance
The following charts show the share price performance of Bisalloy Steel Group Ltd (formerly Atlas Group
Holdings Ltd) ordinary stock (BIS) relative to the price levels of the Australian All Ordinaries (AORD) Index.
Figure 1 shows a strong depreciation trend. There have been two relatively stable periods:
- July 04 – July 05 when BIS stock was fluctuating in its top price range
- July 06 – September 07 when the stock was fluctuating in the middle price range.
There have been three periods of very sharp decline in price (Apr-Jul 06, Sep 07-Apr 08 and Aug 08-Jun 09)
which brought price to its current lowest levels. $1 invested in Bisalloy (Atlas) Group in June 2004 and held
until now is worth only $0.17 which is 83% decline in nominal value.
The BIS stock depreciation pattern in Sep 07- Jan 09 largely mirrors a decline in price for All Ordinaries.
There have also been several periods when prices of BIS and AORD have moved in the same upward
direction. This is supported by regression analysis which shows the Bisalloy stock is positively correlated
with All Ordinaries Index which is more evident in recent share price performance shown in figure 2.
Figure 1: Historical Share Price Performance (Average Monthly Prices)
Bisalloy Steel Group (BIS) Ordinary Share vs All Ordinaries (AORD) Index
Source: Australian Security Exchange (2010)
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Figure 2: Recent Share Price Performance (Average Monthly Prices) September 2009-10
Bisalloy Steel Group (BIS) Ordinary Share vs All Ordinaries (AORD) Index
*Source: Yahoo Finance Australia (2010)
1.4 Company Structure
Bisalloy Steel Group Ltd includes Bisalloy Steels Pty Limited in Australia and joint venture distribution
businesses PT Bima Bisalloy (Indonesia) and Bisalloy (Thailand) Co Limited (see figure 3 below). Both joint
ventures have solid market positions in their respective countries.
PT Bima Bisalloy operates in the Indonesian archipelago and combines resources of Bisalloy and Jakarta
based PT Bima Narendra, a leading specialty metals distribution company with an extensive business
network throughout South East Asian countries. In addition to distribution services, PT Pima Bisalloy
provides various processing services such as drilling, cutting, bending, rolling, etc. Bisalloy Steel Group has
a 60% share of PT Bima Bisalloy which commenced trading in 1995.
Bisalloy Thailand is focused on distribution and marketing of Bisalloy Group products. Bisalloy has an 85%
share of the Thailand venture which commenced trading in 2002. While Bisalloy has more control over its
Thailand joint venture, it has less ability to forecast revenues as Bisalloy Thailand is largely dependent on
equipment manufacturers in their local market who are involved in the export trade.
Bisalloy Steel Group Ltd
Bisalloy Steels Pty Ltd
(Australia)
Bisalloy Asia
PT Bima Bisalloy
(Indonesia)
Bisalloy Thailand
Figure 3: Bisalloy Steel Group Company Structure
Figure 4: Bisalloy Customer Segmentation,
Estimated % Total Revenue
Figure 3: Bisalloy Industry Segmentation,
Estimated % Total Revenue
End-Users
Other
Both Figure 3 & 4 sourced and adapted from Bisalloy Steel Group Investor Update (September 2010)
* Figures adapted from Figure 3, Datamonitor (2009) page 11 & Figure 2, Datamonitor (2010) page 10
Figure X: Australian Metals & Mining Market
Segmentation, % Market Value (2009)
Figure X: Asia-Pacific Steel Market
Segmentation, % Market Value (2009)
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Both joint ventures suffered in the last financial year due to the global financial crisis, however their low fixed
cost bases combined with development work undertaken in prior years to broaden product and customer
markets proved an effective means of maintaining profitability during extremely difficult trading times.
Bisalloy Steel Group intends to expand its current joint ventures network. In 2008, Bisalloy Steel (when part
of Atlas) entered into a letter of intent with a major Chinese steel mill to establish a joint venture for
development of a 140,000 tonne per annum heat treatment centre in China. This joint venture will provide
Bisalloy with the future production capacity necessary to take advantage of significant quenched and
tempered plate market throughout the Asia-Pacific region (Atlas Group AGM presentation 2008). However,
due to the financial crisis, and a subsequent fall in demand for Steel products, Bisalloy suspended the launch
of the Chinese joint venture. Despite this set-back, the concept remains a key strategic initiative for the
Group. (Bisalloy AGM presentation 2009).
1.5 Products & Facilities
Bisalloy Steels has brought quenched and tempered plate into the modern era with enhanced fabrication
qualities. Quenched and tempered (Q&T) plate represents a steel that is much stronger and harder than
ordinary carbon steel. Q&T steel plates are used for the manufacture and repair of machinery and structures
where greater abrasion resistance or higher yield strength are required. Bisalloy Steelʼs key products are
shown in table 1 below. Figure 4 shows each productʼs share of production by tonnes.
Table 1: Bisalloy Steel Group Key Products
Category Wear Plate Structural Plate Armour Plate
Products Bisplate 400, 450, 500 Bisplate 60, 70, 80, 80V
Bisplate HHA, HTA, UHTA,
HAI Class 1 & 2
Application/use
Dump trucks, earth moving
equipment and mining
applications
Booms on cranes, storage
tanks, columns and beams
in buildings
Armoured personnel
carriers
Figure 4: Product Share of Production (by Tonnes)*
Armour Plate
10%
Structural Plate
35%
Wear Plate
55%
*Source: Bisalloy Steel Group Investor Update (September 2010)
Bisalloyʼs continuous flow processing plant in Unanderra has the capacity to produce approximately 65,000
tonnes of Q&T steel plates per annum which Bisalloy market as ʻBisplateʼ. The raw material is steel plate,
also called ʻgreenfeedʼ and is sourced from multiple steel mills located domestically and overseas. Bisalloyʼs
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value-adding process involves heating and rapidly cooling greenfeed, to alter the grain structure of the steel
plate and achieve desired physical properties, such as higher strength.
Recent Bisalloy product development has lead to improvement of product surface, flatness and weldability
and fabrication ability. Another development in the steel industry has been fabrication of ʻmodernʼ steels with
cleaner and leaner chemistries. Refinement of Bisalloy chemistries has resulted in lower carbon equivalents
with improved weldability, impact toughness and formability. Modern Q&T steels now have improved
hardness up to 400HB, in thicknesses less than 20 millimetres, which offers weldability similar to plain rolled
carbon steels.
The enhanced properties of these new Bisalloyʼs products allows engineers more flexibility in design,
provides fabricators with a more user-friendly product and offers potential productivity gains to end-users. As
a result, profitability will be enhanced via more cost effective and efficient welding, fabricating, bending and
rolling capability.
Case study*
Taiwan's leading manufacturer of truck-mounted cranes, GW Machinery, has dramatically increased its
market share since adopting Bisalloy's Bisplate steel for its cranes. Operating in a fiercely competitive market,
GW sought to produce cranes that were lighter, could reach higher and lift heavier loads. Already well
established with its mild steel units, the company selected Bisplate as the solution to its need for reduced
weight and increased performance. The use of Bisplate clearly achieved these objectives. Overall crane
weight was reduced by 1500kg, while lifting capacity is increased by 2000kg. In addition, Bisplate's higher
strength allowed thinner and longer boom sections, extending critical reaching capacity by 1.6 metres. With
this enhanced design GW Machinery has achieved a 50 percent increase in sales and a massive 80 percent
market share.
*Source: BlueScope Steel Australia News, 2010
1.6 Customer Segmentation
Customer segmentation is spread across number of industries and customers. The majority of sales revenue
comes from the mining and transport industries, with an increasing number of orders from the military/
defence sector (see figure 5 below). Governments in the US, India, the Middle East and Asia have recently
qualified Bisalloyʼs armour plate for use by their militaries, and the company believes that exports of armour
plate will now far exceed domestic orders (Steel Australia 2010).
Bisalloy Steel Group Ltd
Bisalloy Steels Pty Ltd
(Australia)
Bisalloy Asia
PT Bima Bisalloy
(Indonesia)
Bisalloy Thailand
Figure 3: Bisalloy Steel Group Company Structure
9%
6%
BlueScope
3%
Armour Manufacturers
8%
Bisalloy Asia
11%
Local Distributors
50%
Caterpillar
13%
Agriculture
3.0%
General Engineering
5.0%
Military
10.0%
Mining
70.0%
Transport
12.0%
Figure 6: Bisalloy Customer Segmentation,
Estimated % Total Revenue
Figure 5: Bisalloy Industry Segmentation,
Estimated % Total Revenue
End-Users
Other
Both Figure 5 & 6 sourced and adapted from Bisalloy Steel Group Investor Update (September 2010)
* Figures adapted from Figure 3, Datamonitor (2009) page 11 & Figure 2, Datamonitor (2010) page 10
Figure X: Australian Metals & Mining Market
Segmentation, % Market Value (2009)
Figure X: Asia-Pacific Steel Market
Segmentation, % Market Value (2009)
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The largest customer segments are local distributors, Bisalloy Asia and armour manufacturers. Sales to local
distributors account for 50% of sales, with Caterpillar Inc, Bisalloyʼs largest single customer accounting for
13% of total sales revenue (see figure 6 above). Sales of normalised steel plate to BlueScope Steel account
for 3% of revenue. In total, it is estimated that approximately 70% of revenue is generated from domestic
customers. The remaining 30% of sales revenue comes from exports, 11% to Bisalloy Asia and 8% to
international armour manufacturers.
1.7 Corporate Strategy and Objectives
After the sale of the Atlas distribution business and company restructure, Bisalloyʼs continuing operations are
focused too primary processing where Bisalloy value-adds by converting supplier manufactured product
through processing (e.g. quenched and tempered) into a form suitable for sale. The following objectives and
growth initiatives of Bisalloy management, stated in Bisalloyʼs most recent financial report highlight the new
direction of the Bisalloy Group:
a) Replication of Quench & Tempering production processes
! The Group is now focused on leveraging off its significant intellectual property associated with Q&T
! production processes. While the primary value of this intellectual property is delivered through the
! production of Bisplate Q&T steel plates from its Unanderra, NSW production facility, the opportunity
! to replicate this highly efficient continuous flow production process in other locations continues to be
! a focus of Group management. Any strategic project or collaborative association that could provide a
! second !Bisplate production facility would enable the existing Unanderra facility to optimise
! production by focusing on heavy gauge plate and source thin gauge plate for Bisalloy Asia.
b) Launch of a new joint venture in China which would provide future production capacity to take
advantage of the very large Q&T plate market throughout Australasia and the East Asian region.
c) Targeted initiatives to build presence and deliver market share growth in Western Australia
d) Roll-out to market in FY10-11 of increased range of wear grade plate to eliminates gap in product
portfolio
e) Armour plate growth domestically and internationally
f) New sourcing strategy for ʻgreenfeedʼ both domestically and internationally to maximise opportunities
from global steel pricing while reducing risk from a single dominant supply relationship.
These objectives suggest Bisalloy Steel Group is building upon existing resources and capabilities to create
value and exploit economies of scale between its business units, increasing resource efficiency, lowering
costs and enhancing overall profitability.
Bisalloy Management Outlook as at August 2010*
*Sourced from Bisalloy Steel Group Ltd FY10 Annual Results Presentation
1.8 Sources of Competitive Advantage
Bisalloy Steels Groupʼs processing plant at Unanderra is now a continuous flow operation where human
intervention is at a minimum. Bisalloy have the ability to ramp up production inline with demand, up to 24hr
production over 330 days per calendar year without any significant additional capital expenditure. Current
market demand is subdued as a result of the Global Economic Crisis, however it is anticipated that demand
for steel will continue to improve during economic recovery, encouraged by government spending on steel
Page 14
Outlook
ƒ Although the Company operates within the steel sector its marketing mix indicates a strong
leverage to the resource sector.
ƒ Overall market conditions remain positive. Notwithstanding pricing remaining competitive,
production volumes continue to increase. Whilst there have been some increases in steel
input costs, margins have recovered from the level experienced throughout calendar year
2009.
ƒ Key commodity prices, while somewhat volatile quarter on quarter, appear to have stability
over the medium term with prospects for future growth (i.e. emerging market
industrialisation and urbanisation expected to underpin demand for commodities).
PEAK
H1 FY09
STABALISE
H1 FY10
RECOVER
H2 FY10
GROW DOWNTURN
H2 FY09
Based on current market conditions, the Board expects the improvement in the quench and
tempered steel market conditions experienced during the second half of FY10 will continue
into FY11.
12
intensive projects. Therefore, Bisalloyʼs production capacity places them in a strong position when demand
recovers. The main weaknesses of Bisalloy is their lack of diversification as a ʻsingle productʼ business, and
limited operating capacity from having just one processing plant. However, the company has a number of
strengths which provide Bisalloy with sources of competitive advantage:

Australiaʼs only manufacturer of high-tensile and abrasion-resistant quenched and tempered plate

Exposure to strong performing resources sectors (i.e. mining and military),

Quality product and brand awareness with brand recognition for Bisplate

Exposure to emerging Asian markets via Bisalloy Asia joint ventures

High barriers to entry associated with Bisalloyʼs niche product and technical intellectual capital plus
high start-up capital requirements

Increased capacity and improved manufacturing efficiencies from the installation of a second shot
blaster and laser guided vehicle at Unanderra plant

A diversified supplier base, sourcing ʻgreenfeedʼ steel plate from Chinese and domestic steel mills.
By definition the sources of competitive advantage are normally presented by firmʼs core competencies
which are valuable, rare, costly to imitate, and non-substitutable. In Bisalloyʼs case, core competencies may
be formulated as:
• Ability to produce high-tensile and abrasion-resistant Q&T steel plate
• Highly efficient production line with very modest fixed cost base and simple variable cost structure
• Knowledgeable and experienced management team with a first rate skills in business administration
and unique knowledge of production processes for the given industry sector.
1.9 Ownership Structure
Bisalloy Steel Group shareholder base is relatively small, with 2,989 register entries, with 109 large
shareholders owning almost 90% of company capital (as at 22 August 2009). The largest shareholders are
Anchorage (BSG) Pty Limited, followed by Balron Nominees Pty Limited, RBC Dexia Investor Services and
Prospect Custodian Limited who together control a 48.9% share as shown by table 2 below. Anchorage Pty
Ltd is associated with Phil Cave, the Bisalloy chairman, and Balron with Peter Smaller, a former Atlas
director. Both Anchorage and Balron have made unsuccessful attempts to take over Bisalloy Steels prior to
creation of Bisalloy Steel Group Limited.
Table 2: Bisalloy Steel Group Equity Securities & Major Shareholders*
Total number of (ordinary) shares 216,455,965
Total number of shareholders 2,989
Largest Shareholders % of ordinary shares
1. ANCHORAGE (BSG) PTY LIMITED 15.49%
2. BALRON NOMINEES PTY LIMITED 13.90%
3. RBC DEXIA INVESTOR SERVICES 11.92%
4. PROSPECT CUSTODIAN LIMITED 7.55%
5. NATIONAL NOMINEES LIMITED 3.44%
6. INTERB INVESTMENTS PTY LIMITED 3.14%
7. CONTANGO NOMINEES PTY LIMITED 2.59%
8. CLYDE BANK HOLDINGS (AUST) PTY LIMITED 2.47%
9. ANZ NOMINEES LIMITED 2.32%
10. SILVERSTREET PTY LIMITED 1.79%
11. CITICORP NOMINEES PTY LIMITED 1.16%
12. SPINITE PTY LIMITED 1.11%
*Source: Bisalloy Steel Group Annual Report 2009 (Correct as at 22 August 2009)
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GE Capital (GE Commercial Australasia Pty Limited) is one of the key stakeholders as a provider of principal
finance facility for Bisalloy. This facility was recently renewed through to October 2012 with a limit of $32
million (Bisalloy Steel Group Media Release 2010).
1.10 Capital Structure
There was a significant change in Bisalloy capital structure in the last 2 years which is reflected by changes
in the gearing ratio. Bisalloyʼs gearing ratio was reduced in FY09-10 to 60%, down from 109% in FY07-08.
Therefore Bisalloyʼs capital structure at the end of FY09-10 was made up of 60% debt, and 40% equity.
In the 5-year period prior to 2007, the Group incurred significant debts to finance its production line
improvements and distribution network development. This led to lower equity, a high reliance on borrowed
funds and a higher risk rating for Atlasʼs Group shares and the company overall. However, the company has
made positive ground over the last few years. Bisalloy management has paid close attention to their capital
structure to ensure less-risky ratings and the lower the cost of capital.
There have been three major strategies implemented to address this objective as follows:
1. Raise additional share capital: In December 2008 Bisalloy announced a fully underwritten
renounceable rights issue of 4 new shares for every 5 shares at an issue price of $0.25 per share.
The rights issue was completed in January 2009 and raised $19.7m (net of costs) to support
working capital requirements and strengthen the Groupʼs balance sheet. In August 2009 the Group
has successfully raised $4.9m of equity capital through an unconditional placement of 28m
ordinary shares to existing institutional investors and a new sophisticated investor at $0.175 per
share.
2. Postpone payment of dividends: No dividend has been declared or paid for FY ending of 2008,
2009 and 2010 (preliminary).
3. Renegotiate more favourable cost of capital for future borrowings: In FY 08-09 Bisalloy entered into
a new facility agreement with GE Commercial Australasia Pty Limited, comprising a $40m revolving
loan facility and a $12m term loan facility. Access to bank facilities, previously limited by covenant
constraints, was recently renewed for two year period to October 2012 at significantly lower cost.
Renewed access to facilities for hedging against foreign exchange exposure has restored
Bisalloyʼs ability to offset such risk.
While Bisalloy its gearing ratio decreased by 27% in the last financial year, this ratio is still very high
compared to other industry players. Therefore it is important to monitor whether (and how) Bisalloy
management will follow the above debt reduction strategies and what the outcomes would be
14
1.11 Senior Management
Figure 7 below provides an overview of the senior management structure and briefly touches on the
background of Bisalloyʼs Executive and Non-Executive Directors.
Figure 7: Bisalloy Senior Management Structure
Bisalloy Thailand
Non-Executive Chairman
Phillip Cave
Bisalloy Steels Pty Ltd
(Australia)
Bisalloy Asia
PT Bima Bisalloy
(Indonesia)
Phillip Cave is an independent Non-Executive Chairman of Bisalloy. His
career has involved company turnaround projects, in addition to fiance
and corporate advisory. He has operational management experience in a
wide range of industry sectors including finance and banking.
Managing Director & CEO
Robert Terpening
Robert Terpening is the Managing Director of Bisalloy therefore is in charge of the day-to-day
running of the business. He was appointed as MD after the sale of the Atlas Distribution
business, but has been involved with management of the Atlas Group since 2001. He has over
30 years experience working in industrial type companies where he has gained expertise in sales
& marketing, operations and general management of manufacturing entities. He has also
managed overseas operations in Indonesia, Thailand and New Zealand. He is currently a Director
of Bisalloy Steels Group’s Joint Ventures; PT Bima Bisalloy and Bisalloy (Thailand) Co Limited.
Non-Executive Director
Graeme Pettigrew
Non-Executive Director
Richard Grellman
Non-Executive Director
Kym Godson
Kym Godson, Graeme Pettigrew and Richard Grellman are all Non-Executive Directors therefore are not involved in
the day-to-day running of the business. Pettigrew and Grellman are both independent to the company and have
been appointed because of their knowledge and management experience of industrial businesses in the steel
industry and manufacturing/supply-chain/distribution. Grellman, as an ex-Partner of KPMG brings accounting and
finance skills to the board. Kym Godson is the former Managing Director, and handed over this position to
Terpening in November 2008 before being a Non-Executive Director.
Chief Financial Officer
David MacLaughlin
David MacLaughlin!is the company’s Chief
Financial Officer. He has worked in senior
finance positions to subsidiaries of larger
international corporate groups and Australian
listed companies.
15
2. The Economic Environment
2.1 Overview
The most acute phase of the Global Economic Crisis has passed (BlueScope 2010). World output (GDP) is
expected to rise by approximately 4.5% after a 0.5% contraction in 2009. The global economy is now in a
post-crisis stage of recovery, after the Global Financial Crisis which resulted in a pronounced economic
downturn. The global recovery has come about better and faster than expected and this speed is expected
to continue in the short-term (IMF 2010). Emerging Asian economies are leading this recovery, particularly
China while advanced economies of Europe, Japan and the United States lag behind (IMF 2010). So far,
recovery has been driven primarily by government fiscal stimulus which has improved demand and growth
prospects.
Seventy-percent of Bisalloyʼs business comes from the domestic market, thus future earnings are leveraged
primarily the outlook of the Australian economy. For this reason, macroeconomic analysis has been focused
to Australia. Furthermore, as the steel industry has a cyclical nature, performance in this industry will depend
significantly on the economic outlook. Australia has benefited from demand from China for Australian
minerals, however recovery remains fragile as government stimulus is removed.
2.2 Macroeconomic Indicators
It is necessary to look at a range of macroeconomic indicators to evaluate the state of the current economy
and forecast the future outlook (Viney 2009). Such macroeconomic indicators include, although not limited to
employment, inflation, terms of trade, housing loans, retail sales, hours of overtime and commercial building
approvals. In this valuation report, terms of trade, inflation and commodity prices, interest rates and
exchange rates are discussed followed by the forecast for economic growth (GDP).
Terms of trade
Terms of trade is the ratio of export prices to import prices (The Treasury, 2002) and a rise in the terms of
trade allows Australia to buy more imports for a given amount of exports, increasing domestic income.
Exports are increasing due to Chinese demand for Australian raw materials like coal and iron ore as shown
by the graph below (Smirk, 2010). Unit export returns for metals and other minerals are forecasted to
increase by 29% in 2010-11 after returns of -8.8% in the previous year. Many are saying the quick recovery
in Asian growth is the reason for higher export prices for Australia and greater mining investment (Pradhan,
2010).
*Graph sourced from ABARE Australian Commodities Report (2010)
Australian commodities t vol 17 no 2 t June quarter 2010 385
higher than the JFY 2009 negotiated contract prices throughout the remainder of the outlook
period. However, export earnings on a quarterly basis may be volatile reflecting the quarterly
price setting mechanism which is, in part, based on average iron ore spot prices over the previous
quarter.
Australia’s metallurgical coal export volumes are estimated to increase by 21 per cent to
151 million tonnes in 2009-10. However, export earnings decreased by 36 per cent to
$23.5 billion reflecting lower contract prices for JFY 2009 and an appreciation of the
Australian dollar.
In 2010-11, Australia’s exports of metallurgical coal are forecast to increase by 1 per cent to
152 million tonnes. This increase will be underpinned by the ramp-up of production from Vale’s
new longwall expansion at Carborough Downs and the expansions completed at Dalrymple
Bay and Abbot Point in 2009, which are all in Queensland.
Australian export earnings from metallurgical coal in 2010-11 are forecast to increase by 46 per
cent to $34.5 billion. This will be underpinned by expected increased export volumes through
newly developed infrastructure capacity, combined with higher forecast prices.
Australian iron ore exports
Mt
volume
value (right axis)
2009-10
$b
10
20
30
40
50
100
200
300
400
500
2010
-11f
2009
-10 s
2008
-09
2007
-08
2006
-07
2005
-06
2004
-05
2003
-04
2002
-03
2001
-02
2000
-01
Steel and steel-making raw materials
16
Therefore to counteract the effects of higher export prices it is predicted that the RBA will want to increase
the cash rate in an attempt to stablise export prices. The sustainability of Australiaʼs high terms of trade
depends on the supply response to high commodity prices, the long-term trend of commodity prices and the
industrial development of China and India (Treasury 2010).
Inflation & Metal Commodity Prices
Inflationary pressures are evident from elevated commodity prices, which have been at record highs in
recent months (Callick 2010). As previously discussed, demand from China is causing a surge in the prices
of these commodity materials (Heath & Petrie, 2010). Chinaʼs rate of urbanisation is expected to increase
over the medium term as shown by figure 8 below. This is a huge stimulus to the Australian economy, which
Heath and Petrie (2010) claim may be of greater impact than fiscal stimulus by government last year. As a
result, inflation is likely to increase at least in the short-term to 2011 as growth forecasts remain strong.
Figure 8: Urbanisation & GDP per capital in China
*Graph sourced from The Treasury’s Economic Roundup (2010)
However, the RBA in their August 2010 statement on monetary policy claim inflation in Australia has
moderated due to slowing wage growth, exchange rate appreciation and easing demand. There was a 0.6%
rise in the CPI for the June quarter, which was mainly contributed to a rise in tobacco prices. However
underlying inflation remains within the RBA target of 2-3% for the first time since September 2007 (RBA
2010).
Outlook to 2015: Terms of trade will remain high until mid 2012, then decline
Increasing demand and higher prices will encourage supply, which has been reflected by increased mining
investment into projects like the Gorgon LNG project in Western Australia to increase capacity (Heath &
Petrie 2010; RBA 2010). Thus, the increase in supply should see medium-term commodity prices flatten,
and terms of trade decline. However, it is thought that long-term commodity prices will trend upward
overtime as non-renewable resources are depleted and cost of extraction increases (Treasury 2010).
Demand from China and India is forecasted to remain strong over the long-term (IMF 2010). Therefore,
due to strong demand for Australian commodities, it is thought high terms of trade will be sustained for
sometime, however this period is subject to a high degree of uncertainty (Treasury 2010).
China: growth, urbanisation and mineral resource demand
61
Chart 3: Contributions to worId reaI GDP growth
-2
-1
0
1
2
3
4
5
6
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
-2
-1
0
1
2
3
4
5
6
Advanced economies Emerging and developing economies (ex. China) China
Per cent Per cent

Source: ÌMF and Treasury.
!
China's urbanisation convergence
"#$%&'(!)&*$+!,-.%./$-!-.%0,)1,%-,!#&(!-.$%-$+,+!2$3#!)&*$+!4)5&%$(&3$.%6!7$%-,!89:9!
;3#,! 5,1$%%$%1! .<! 3#,! ),<.)/! *,)$.+=>! 3#,! (#&),! .<! "#$%&'(! *.*4?&3$.%! ?$0$%1! $%! 4)5&%!
&),&(! #&(! $%-),&(,+! 5@! A:! *,)-,%3&1,! *.$%3(>! <)./! 89! *,)! -,%3! 3.! BC! *,)! -,%3! $%! ADD9!
;"#&)3!B=6!
Chart 4: Urbanisation and GDP per capita in China
0
10
20
30
40
50
60
70
80
1950 1960 1970 1980 1990 2000 2009 2015(p)
100
1,000
10,000
100,000
Urbanisation rate (LHS)
GDP per capita (RHS)
Since 1979
Per cent US$ ppp (log scale)

Source: United Nations, ÌMF and Treasury.
17
Interest Rates
Since the global financial crisis, the RBA has reduced the cash rate to record lows in order to help stimulate
the economy. However, as the research above demonstrates, it appears the Australian economy is
stabilizing with growth on trend as expected and inflation close to target. The RBA feels that interest rates
need to be closer to average (Stevens, 2010). The normal rate is said to be around 5.00-6.00% (Oliver,
2009).
Exchange Rates
The behaviour of currencies in the foreign exchange market is hard to predict because there are many
factors to consider across many countries. However, on consideration of relative macroeconomic factors
previously discussed, we can sum the effects of these factors to give us a somewhat informed short-term
outlook.
Outlook to 2015: Metal commodity prices predicted moderately decline from 2012 to 2015
Inflationary pressures are forecasted to remain strong throughout the Asia-Pacific as growth momentum
remains strong, particularly in emerging Asia (IMF 2010). However, growth is predicted to moderate from
2012 onwards as inventory cycle effects and government stimulus have run their course (IMF 2010). For
Australia, inflation is expected to by slightly above 3% for the remainder of 2010, then thought to decline to
2.75% by 2012 (RBA 2010). This reflects the effects of better capacity utilisation and forecasted increase in
wage growth. However, if the recent policy measures of China to slow growth result in larger than
predicted economic slowdown, then inflation would be lower than forecasted (RBA 2010).
Outlook to 2015: Subject to inflation, Australian interest rates set to rise then stablise
Strongly correlated with inflation, economic indicators such as rising prices of Australian exports, high
commodity prices, wage growth and mining investment all add to the cause for further interest rate rises in
the short term. There are forecasts that mining investment spending will increase by $60 billion in 2011
(Pradhan, 2010). RBA Governor, Ric Battellino (2010) says “there is only so much activity that can take
place, and if we want to have all this mining investment and mining output, which is happening, then
basically the other part of the economy, for the moment, will have to be restrained somehow. You canʼt do
all these things simultaneously”. Such restraint will be via interest rate policy, therefore as mining
investment continues to boom, it seems interest rates may rise in order to keep consumer spending down.
Westpac Economist, Bill Evans (2010) predicts that the next interest rate rise will come in February 2011,
and this will be the first of three for that year. However, as inflation is forecasted to moderate over the
medium term, it is likely that interests rate will stabilise over the same period.
Outlook to 2015: Short-term volatility, yet stable over the long-term
The Australian dollar is expected to average around US87c in the 2010-11 period, however is expected to
fluctuate during the year in line with supply and demand conditions (ABARE 2010). Sustained demand for
Australian exports should see the AUD appreciate, while high commodity prices may cause Asian steel
manufacturers to hold out for lower prices while steel prices remain low. The anticipation of a rise in
interest rates will has already had positive effect on the AUD in the past month however the AUD still
carries a ʻriskyʼ status that is unlikely to change in 2011 (Evans 2010). However, a stronger currency is
likely to negate higher earnings from the growing commodity exports and may result is cautious businesses
sentiment for sometime (Deloitte 2010). The volatility of the AUD remains high relative to the long-term
18
2.3 Economic Outlook
Economies that have experienced strong growth are expected to continue their strong performance into 2011
and 2012, whereas the slower growth experienced in some advanced economies due to prolonged damage
to households and the financial sector is expected to continue in the short-term (IMF 2010). The
industrialisation in emerging economies will continue to grow rapidly, thus GDP growth is forecasted in
remain strong over the medium-term in these economies, particularly China as shown by the graph below.
As the majority of fiscal stimulus has now been withdrawn, the positive effects of government spending on
GDP growth will fade over the short-term. It is thought that medium to long-term growth will depend on
emerging economies ability to sustain domestic demand and reduce reliance on exports to advanced
economies who have weaker demand prospects (IMF 2010).
Overall, GDP is expected to climb until 2011 where it will moderate to a sustainable level over the medium-
term as shown by figure 2.2 below. This is consistent with the cyclical properties and outlook of
macroeconomic indicators over the same period as discussed above.
Inflation Australia Asia-Pacific
(Excl. Australia)
-5%
-3%
0%
3%
5%
8%
10%
13%
15%
2006 2007 2008 2009 2010 2011f 2012f 2013f 2014f 2015f
Figure 2.2: GDP % Growth (Constant Prices, National Currency)
Australia China Asia-Pacifc World
* GDP Data taken from EconomyWatch.com
Cyclical Properties of the Stock Market
A common method of identifying the cyclical properties an economic variable, industry or stock is to calculate
its correlation with GDP growth over the economic cycle (Black & Cusbert 2010). We can use returns of
S&P/ASX 200 Index as a proxy to demonstrate how the returns of the aggregate stock market fluctuate
based on the cyclical phase of the business cycle. The correlation matrix table 3 below shows the average
quarterly returns of S&P/ASX 200 in relation to GDP growth from June 2005 to June 2010, which in this case
represents the business cycle.
Table 3: Market Returns & GDP Correlation Matrix
Australian GDP Growth (%) S&P/ASX 200 Returns (%)
Australian GDP Growth (%) 1 0.848440831
S&P/ASX 200 Returns (%) 0.848440831 1
19
Here we can see that the stock market proxy returns are have high positive correlation with GDP growth,
which means they move in the same direction as the business cycle. This relationship shows why expected
market returns can be calculated by multiplying the probability of different economic growth scenarios with
the estimated market return for that scenario. Probabilities are based on economic outlook discussed above.
This calculation is shown in table 4 below.
Table 4: Calculation of Expected Market Return
Economic Scenario
(GDP % Growth)
Estimated Market
Return Under Scenario
Probability of Scenario
Occurring
Market Return
Very Strong (>5%) 25% 10% 2.5%
Strong (2-5%) 15% 60% 9%
Flat (1-2%) 5% 20% 1%
Weak (<1%) (10%) 10% (1%)
Sum [E(Rm)= Sum [E(Rm)= Sum [E(Rm)= 11.5%
20
3. The Asia-Pacific Steel Industry
3.1 Overview
Bisalloy operates primarily in the Asia-Pacific steel industry which forms part of the broader metals and
mining industry. The metals and mining industry which includes aluminum, steel, iron, precious metals,
minerals, coal and base metal markets (Datamonitor 2010). The steel industry includes production of crude
steel as well as steel foundries for smelting, rolling, forging, spinning, recycling, stamping, polishing and
plating of steel products such as pipes, tubes, wires , springs, rolls and bars (Zacks 2010).
Due to the wide range of applications for steel, the steel market supports a diverse set of end-customers.
The main drivers of steel consumption are large industrial customers operating in the automotive, transport,
mining, agriculture and construction industries (Deloitte 2008). Due to the nature of these industries, demand
for steel increases during periods of industrialisation, urbanisation and economic growth (Tulpule 2010). The
Asia-Pacific region also is highly dependent on external demand from North America and Europe (IMF 2010)
however countries like China and India will continue to be the main sources of steel demand for development
in their own economies.
Market segmentation
Steel is the most lucrative segment of the Asia-Pacific metals and mining industry, contributing 72% of
industry value in 2009 (Datamonitor 2010). Australia accounts for 5.7% of the metals and mining market
value in the Asia-Pacific region. However, only 9.9% of Australiaʼs metals and mining market value comes
from Steel as shown by figure 9 below (Datamonitor 2010). According to Datamonitor (2009), production in
the Asia-Pacific steel market is dominated by China, followed by Japan, India and South Korea as shown by
figure 10 below. The remaining 3.2% of market value is generated by Australia, Singapore and Taiwan.
China accounted for the majority of steel production growth in 2009, producing 48% of total world steel
output (ABARE 2009). Today Chinaʼs share of the world steel market is larger than the combined production
of the United States, European Union, Japan and Russia who were historically the largest steel producing
nations (Zacks 2010). Chinaʼs impressive steel production has been driven by industrialisation and
urbanisation, supported by a government support package focused on infrastructure spending (McDonald
2010). However, Chinese demand has positive ʻspilloversʼ to other countries in the Asia-Pacific region as it
boots imports of commodities and capital goods (IMF 2010).
Bisalloy Steel Group Ltd
Bisalloy Steels Pty Ltd
(Australia)
Bisalloy Asia
PT Bima Bisalloy
(Indonesia)
Bisalloy Thailand
Figure 3: Bisalloy Steel Group Company Structure
Figure 6: Bisalloy Customer Segmentation,
Estimated % Total Revenue
Figure 5: Bisalloy Industry Segmentation,
Estimated % Total Revenue
End-Users
Other
Both Figure 5 & 6 sourced and adapted from Bisalloy Steel Group Investor Update (September 2010)
Australia, Singapore & Taiwan
3.2%
South Korea
6.1%
India
6.3%
Japan
20.9%
China
63.5%
Aluminium
4.8%
Steel
9.9%
Base Metals
15.8%
Precious Metals & Minerals
16.7%
Coal
52.8%
* Figures adapted from Figure 3, Datamonitor (2009) page 11 & Figure 2, Datamonitor (2010) page 10
Figure 9: Australian Metals & Mining Market
Segmentation, % Market Value (2009)
Figure 10: Asia-Pacific Steel Market
Segmentation, % Market Value (2009)
21
WorldSteelʼs (2010) crude steel production statistics for July 2010 show China and Indiaʼs market share has
increased, while Japanʼs share of steel production has declined as shown by figure 11 below. Australia
contributed just 0.9% of steel market volume in July 2010, demonstrating that it is a very small player in the
Asia-Pacific steel market. However, Australian steel companies still remain competitive and hold a strong
position in the Asian-Pacific steel industry because of their access to high quality raw materials and
resources, strong population growth and continued demand from the construction sector (Steel Australia
2010). Australiaʼs core competency in the metals and mining industry is coal mining, as shown by figure 9
above. Coal is used in 70% of world steel production (Australian Coal Association 2010), so the coal and
steel industryʼs are highly interdependent.
Figure 11: Australiaʼs Market Share of Asia-Pacific Steel Industry
3.2 Key Competitors
The Asia-Pacific steel industry is highly competitive with eight out of ten of the Worldʼs top steel producers for
2009 based in the region (WorldSteel 2010). Some of the most dominant competitors in the Asia-Pacific
industry are as follows.
ArcelorMittal
The worldʼs largest steel producer, accounting for 8% of world production in 2009
(WorldSteel 2010) with strong presence in the Asian market. With operations in over
60 countries, the company manufactures rolled, galvanised and coated steel
products including quenched and tempered plate (Datamonitor 2009; Deloitte 2008).
Nippon Steel Corporation
The company has a diverse range of business which include steel making, engineering,
construction, chemicals and urban development. Operating primarily out of Japan, its
steel making activities include flat, tube, stainless steel and secondary steel products
(Datamonitor 2009). Nippon was the 4th largest steel producer in 2009 (WorldSteel
2010).
POSCO
POSCO was the third largest steel producer in 2009 (WorldSteel 2010). The company
has operations in South Korea, Japan, China and other parts of the Asia-Pacific
region. Key customers include the shipbuilding, automotive, engineering and
machinery industries (Datamonitor 2009). Steel products include hot rolled steel, cold
rolled steel sheet and tubes (POSCO 2010).
Australia
0.9%
Taiwan
2%
South Korea
6.5%
India
7.8%
Japan
12.5%
China
70.2%
*Based WorldSteel Crude Steel Production Volumes 2010
Figure X: Forecasted Consumption and Production Growth in 2011
0
3.75
7.5
11.25
15
World Asia-Pacific China
Consumption Production
*Forecast Data taken from WorldSteel (2010)
20/09/10 6:06 PM ArcelorMittal becomes an EITI Supporting Company | Extractive Industries Transparency Initiative
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Home › News & Events › News › ArcelorMittal becomes an EITI Supporting Company
ArcelorMittal becomes an EITI Supporting
Company
The steel company ArcelorMittal has become the 40th extractive company to become an International -level EITI
Supporting Company. On 22 January 2009, ArcelorMittal confirmed its support of the Extractive Industries
Transparency Initiative, after being an active participant of the EITI in Liberia since May 2007.
ArcelorMittal is the largest steel company in the world, with over 326,000 employees in more than 60 countries, and
it represents around 10% of world steel output. It ranks 39th on the 2008 Fortune Global 500 list.
In a letter to Peter Eigen, Lakshmi Mittal, Chair and CEO of ArcelorMittal, wrote: "We know that our position as the
leader in the steel industry brings unique responsibilities... The EITI's principles regarding the prudent use of natural
resources, transparency, accountability, and stakeholder dialogue complement ArcelorMittal's own corporate values
and corporate responsibility policies".
In a response letter, Peter Eigen wrote: "I welcome ArcelorMittal to the EITI family... From Kazhakhstan to Liberia,
we are seeing how the initiative is building trust between companies, governments and communities".
For further information, visit ArcelorMittal, or contact Regional Director Eddie Rich at the EITI Secretariat.
Tag: ArcelorMittal, Peter Eigen, Supporting Company
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20/09/10 6:10 PM Japan's Nippon Steel Takes 10 Pct Stake In Queensland Coal Mine | ShipId.com
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Japan's Nippon Steel Takes 10 Pct Stake In Queensland Coal Mine

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Latest news « News archive
6 Aug 2010
Japan's Nippon Steel Corporation has taken a 10 per cent stake in the Foxleigh coal mine in Queensland, as the steelmaker moves to ensure
supplies of raw materials. Nippon has taken the stake in Foxleigh, an open-cut mine in Queensland's Bowen Basin, from Japanese trading house
ITOCHU Corporation. Foxleigh is one of only a small number of mines in Australia with very low ash content and is well suited to making pulverised
coal injection (PCI) coal that is valued by steelmakers.
Other owners in the mine include South African mining giant Anglo American, with a 70 per cent stake, and South Korean steelmaker POSCO, with
20 per cent.
The purchase will contribute to Nippon's stability in obtaining raw materials in the future, the company said in a statement.
"(It) will also strengthen the company's business base as a global player through closer ties with Anglo American and further enhancement of strategic alliance
relationship with POSCO," Nippon said.
The Foxleigh mine began operating in 2000 and produces about 2.5 million tonnes per annum of PCI coal.
Source: AAP
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Decision delayed over granting mining license to
Posco
Submitted by Jaideep Kumar on 2010, July 15 - 13:26 Mining Sector Featured TNM Posco
The High Court of Orissa on Wednesday has set aside the
recommendation of the government of Orissa to grant a
prospecting license to the South Korean steel company
Posco, in the iron ore mines at Khadadhar in Sundargarh district. This could be a setback
to the 51,000crore steel plant to be set up by Posco at Paradeep. In 2009 January, the
government had recommended that Posco be granted a license for prospecting in the
Khadadhar mines in a
2500 hectare area. However, Division bench that comprises of Justice BP Ray and Justice
BP Das, allowed a writ petition that was filed by Geomin Minerals and Marketing based in
Bhubaneswar.
Geomin Minerals had termed the decision illogical and arbitrary and claimed that the first
application for a lease on mining in the area was made by them way back I August 1991.
The Division bench has asked the state government to take a fresh decision regarding the
license giving the petitioned a preferential right of consideration. According to the bench,
the petitioned had preferential right for consideration and the recommendation in favor of
Posco was invalid. Geomin Minerals has also urged the court to restrain the state
government from considering applications files after its application and has sought an
order requesting disposing off of all its application that are pending with the government.
The Division bench has deemed that the writ petition is not premature and in the absence
of an alternate remedy was maintainable. Hence the High Court has directed the
government to dispose of all pending applications of petitioner in the next 4 months. A
dozen more petitions were tagged to the original petition from Geomin minerals, which
include an intervention petition that was filed by Visa Steel. The petition of Visa steel was
rejected by the Bench though and they were asked to file an independent writ petition.
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22
Baosteel Group Corporation
The Chinese company is a major producer of steel products, and was the
second largest producer in 2009 (WorldSteel 2010). They specialise in steel for
automotive, shipbuilding, mining, food and beverage industries, and products
include stainless steel, alloyed steel and living steel (Datamonitor 2010).
Tata Steel Group
The Indian company is now one of the top ten steel manufacturers in the world after
acquisition of European steel producer, Corus in 2007. The group also have 67% equity in
Tata Steel Thailand and own 100% of Singapore based NatSteel Holdings. According to Tata
Steel, NatSteel is one of the largest producers in the Asia Pacific. Their core products
include tubes, wires, flat and long products.
BlueScope Steel Limited
The Australian company operates in both Australia and New Zealand, servicing the
construction, manufacturing and automotive industries. Products include hot and cold
rolled coil, plate and coated products (Deloitte 2008). BlueScope was the 39th largest
steel producer in 2009 (WorldSteel 2010).
OneSteel Limited
Manufactures and distributes products in Australia, and its products are used in
the construction, mining, rail and manufacturing industries. Products include rail,
rod, bare, wire, pipe and tube steel products. They are also involved in the
distribution of steel products and mining and selling of iron ore, the raw material used for steel
manufacturing (Deloitte 2008).
3.3 Porterʼs Analysis
The Porterʼs five forces analysis provides an evaluation of profitability of the Asia-Pacific steel industry in
which Bisalloy operates. It is based on competitive pressures from customers/buyers, suppliers, substitute
products, threat of new entrants and rivalry from established firms. The analysis below shows the Asia-
Pacific steel industry is highly competitive and dominated by several large multinational companies.
Profitability of the industry is high, however success will depend on economies of scale and access to
emerging economies who are the largest consumers of steel products needed for industrialisation and
urbanisation. Consolidation appears to be a common strategy across the industry as a means to increase
market share.
Threat of new entrants
The threat of new entrants is low. With economies of scale seen as an essential element in steel
manufacturing, the market is dominated by several large multinational entities. This also encourages
consolidation via mergers and acquisitions of existing steel companies, such as that of Smorgon Steel and
OneSteel in Australia. Start-up costs for new entrants are very high due to large capital investment needed to
build infrastructure, and working capital required to meet high fixed costs of steel production. Furthermore,
new regulation as a result of climate change will increase production costs and further deter new entrants.
In Australia, the Minerals Resources Rent Tax if enforced will increase costs for steel producers and many
speculate that it will adversely affect the domestic steel industry (Bartholomeusz 2010). Australian firms
looking to export are placed at a disadvantage due to greater distance to end-user markets compared its
Asia-Pacific peers. This may be a additional barrier for new entrants in Australia.
20/09/10 6:17 PM China Vibration Damping Steel Sheet, Steel Hollow Section, Steel Tub…cturer - Shanghai Baosteel Construction Design & Research Institute
Page 1 of 2 http://www.made-in-china.com/showroom/johnwhtcn
Home Product Directory Offer Board Virtual Office
Buyer Service Info Centre Audited Suppliers
Shanghai Baosteel Construction Design & Research Institute
Shanghai Baosteel Construction Design&Research Institute who established in the year 1981 is one subsidiary of Baosteel
Group, and mainly engaged in the development and production of Vibration Damping Steel Sheet, Cold-rolled Forming
Steel Hollow Section, investigation for the advanced process of metallurgy and equipment, and engineering design.
Shanghai Baosteel Institute mainly ... [ Click for Details ]
Member Info
Business Type: Manufacture
Number of Employees: 201 ~ 500
Business Scope: Auto Parts & Accessories, Metallurgy, Mineral & Energy, Construction & Decoration
Member Since: 2003
Last Sign In Date: 2010-08-27
Product List
Product Name Update Date
Square ERW Steel Hollow Section 2009-08-05
Mechanical ERW Steel Pipes 2009-08-05
Steel Hollow Section in Inch Size 2009-08-05
Mechanical ERW Steel Tube 2009-08-05
Bridge U-Shaped Reinforcing Rib 2009-08-05
Medium/Heavy Steel Plate, Ship Plate 2009-08-05
Galvanized Steel Coil, Color Coated Steel Coil 2009-08-05
Round ERW Steel Hollow Section 2009-08-05
Mild ERW Steel Pipe & Tube 2009-08-05
Electro-Galvanized Steel Pipes 2009-08-05
Find More Products
Related Category: Construction & Decoration » Pipe, Tube & Parts » Steel Pipe & Tube
Contact Details
Company Name: Shanghai Baosteel Construction Design & Research Institute
Company
Address:
No. 3801 Huaxiang Road, Minhang District, Shanghai, China
City/Town: Shanghai
Province/State: Shanghai
Country/Region: China
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20/09/10 6:18 PM Tata Steel | TopNews
Page 1 of 8 http://www.topnews.in/companies/tata-steel
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Tata Steel
Tata Steel not to do away with S. African unit
Submitted by Keshav Seth on Wed, 09/08/2010 - 16:22. Company News Steel Sector
Featured TNM Tata Steel India
Indian steel major, Tata Steel has said that it will not be selling
off its South African unit and will be putting in money to revamp
and get the operations going. The information was given by a
company official in reply to the queries that asked about its
earlier announcement of selling the unit.
Talking during the sidelines of a seminar organized by the CII,
H M Nerurkar, managing director of Tata Steel said that they
had approached the buyers but that is no sign that the unit is
being sold.
» Add new comment Read more
Sell Tata Steel With Stop Loss Of Rs 530
Submitted by Shilpa Mahapatre on Thu, 08/12/2010 - 08:20. Analyst View Stock Trading
Buzzing Stocks Steel Sector Featured TNM Tata Steel
Stock market analyst Salil Sharma is of the view that investors can
'sell' Tata Steel stock with target of Rs 780.
According to analyst, the interested investors can sell the stock
with stop loss of Rs 530.
Today, the shares of the company opened at Rs 517 on the
Bombay Stock Exchange (BSE).
The share price has seen a 52-week high of Rs 737 and a low of Rs 413 on BSE.
Current EPS is -3.67.
Tata Steel is all set to declare its standalone results for the three month period ended June
30.
» Add new comment Read more
Tata Steel sales drop in India, shares down
Submitted by Keshav Seth on Wed, 07/07/2010 - 22:22. Company Updates Steel Sector
Featured TNM Tata Steel India
Eighth largest steel maker in the world, Tata Steel has seen a
drop in the sales of the company in India.
To be precise the sales remained flat at 1.4 million tons during
the first quarter ending June 2010. What is hurting the
economy more is the fact that the domestic demand, which
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20/09/10 6:19 PM World Expo 2010 Shanghai - Pavilions
Page 4 of 6 http://www.expo2010china.hu/index.phtml?module=hirarchivum&oldal=12
Macau Pavilion has to offer. Click here >> more info...
288. VICE PREMIER ENCOURAGES METEOROLOGISTS
2010. 10 May
(english.cri.cn) Chinese Vice Premier Hui Liangyu Sunday encouraged the country's
meteorologists to improve weather forecasting ability to better serve the country's
social and economic development.
Weather forecasting is important in carrying out disaster relief, safeguarding people's
life and property security, Click here >> more info...
289. SWISS PAVILION: CHINESE PHILOSOPHY REFLECTED
2010. 10 May
by Li Zhenyu
(english.cri.cn) With a combination of shiny red
curtain and a sightseeing cable car, the Swiss
Pavilion has turned out to be one of the hottest
pavilions at the Shanghai World Expo.
"The most distinguished features of the pavilion
are its curtain of woven aluminum and chairlift
ride," said Andreas Schmucki, Chief Operating
Officer of the Swiss Pavilion. "Our country is portraying itself through an exhibition on
the sub-theme of the Expo, Rural-Urban Interaction."
Click here >> more info...
290. EMISSION REDUCTION AGREEMENT FOR UN PAVILION
2010. 10 May
(chinacsr.com) A carbon offset agreement has been signed at the UN Pavilion in the
Shanghai World Expo Park, making the UN Pavilion the first international pavilion to join
in the voluntary emission reduction initiative at the park. Click here >> more info...
291. AZURE WEATHERING STEEL PANELS CLAD THE EXTERIOR OF AUSTRALIAN
PAVILION
2010. 10 May
(metalworker.com.au) FACADE Solutions used BlueScope Steel
Azure weathering steel panels to clad the exterior of the
Australian Pavilion at the 2010 Shanghai World Expo.
According to Facade Solutions, the Azure weathering steel panels
have been designed to develop an oxidised layer which protects
the steel beneath from further corrosion. Click here >> more info...
292. YEMENI PAVILION ATTRACTED MORE THAN 40 THOUSAND WORLD VISITORS
2010. 9 May
by Saba
(sabanews.net) More than 40 thousand
visitors from various nationalities visited
the Yemeni pavilion in the festive
ceremony in the exhibition area of EXPO
2010 Shanghai.
In a statement to Saba, Director of
Exhibitions at the Ministry of Industry
and Trade Abdul Kareem Senan said Yemen's participation in this international event
under the slogan of "Yemen Civilization and Art" is an opportunity to introduce the
civilization, history and tourism of Yemen.
Click here >> more info...
20/09/10 6:20 PM OneSteel - Steel manufacturer and distributor
Page 1 of 1 http://www.onesteel.com/
OneSteel is a fully integrated, global manufacturer and distributor of steel and
finished steel products, self-sufficient in both iron ore and scrap metal, with revenues
in excess of $6 billion Australian dollars.
OneSteel's major manufacturing facilities are located in Whyalla, South Australia,
Melbourne, Victoria, Western Sydney and Newcastle, New South Wales and Brisbane,
Queensland. Smaller manufacturing and distribution facilities are located throughout
regional Australia.
Additionally, OneSteel has more than 40 operating facilities in New Zealand, Asia and
the Pacific that encompass major manufacturing sites and recycling locations.
OneSteel also operates eight facilities in the United States consisting of Grinding
Media, LiteSteel
TM
Technologies, Recycling and a ferrous shredder in Tampa, Florida.
In total OneSteel services more than 30,000 customers, offers more than 40,000
products globally and employs over 10,500 people.
OneSteel manufactures and distributes structural, rail, rod, merchant bar, cold
finished bar, chrome plated bar, reinforcing, wire, tube, pipes, fittings, valves and
actuation, rail wheels and axles, lite steel beam, grinding media and recycled metals.
The majority of OneSteel’s products are used in the construction, manufacturing,
housing, mining and agricultural industries.
Appendix 3Y - Rosemary
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25/8/2010 more
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Jan 2010
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23
Supplier Power
Supplier power is high. The key inputs for steel production are iron ore and metallurgical coal, and there are
no substitutes for these raw materials (Datamonitor 2009). Commodity prices have risen during 2009 due to
macroeconomic stimulus, but this has encouraged increased supply (Tulpule 2010). In Australia, economic
recovery has seen many new resource projects reinstated and this will increase Australian iron ore and coal
capacity, supporting future steel production growth (Purnell 2010). However the recent move from one year
to quarterly contract prices for iron ore will increase price volatility (ABARE 2010).
Buyer Power
Buyer power is medium. Steel is widely used across a variety of industries and has many applications which
reduces overall buyer power (Datamonitor 2009). There is little product diversification as steel is treated as a
commodity. However some firms in developed economies like Bisalloy do specialise their offering through
value-added processing. This may increase buyer loyalty, but this also reduces the size of their market
(Datamonitor 2009). For most steel companies, the majority of demand comes from large industrial
customers who order direct from the steel mill. These buyers have higher buying power compared to smaller
end-users who buy through distributors as they do not require sufficient volumes to justify direct orders
(Deloitte 2008). The majority of steel consumption in the future will continue to come from the worldʼs
developing economies including China, India, Indonesia in the Asia-Pacific. Access to these markets will be
vital for sustained success, and this explains the dominance of China and India in the steel industry.
Threat of substitutes
Threat of substitutes is low but increasing. There few substitutes for steel because of its structural strength,
however there are substitutes available. These include stone, brick, glass-reinforced plastic and concrete
(Datamonitor 2009). Disadvantages of steel such as its heaviness and corrosion have moved automakers
toward lighter materials like aluminum. Concrete is also seen as more reliable and consistent to estimate
project costs, given the volatility in steel prices over the past couple of years. Steel is more popular in multi-
level building construction in developed countries overseas compared to Australia (Steel Australia 2010). The
number of substitutes for steel appears to be increasing, and this will weigh on steel prices. However most
steel alternatives are not perfectly substitutable (Datamonitor 2010).
Competitive Rivalry
Competitive rivalry is high. ArcelorMittal, Baosteel, POSCO and Nippon Steel dominate the Asia-Pacific steel
market however there are numerous independent players (Deloittle 2008). These are large multinational
companies with operations in a number of countries, and most have businesses in multiple industries. Steel
companies compete on the basis of price, delivery lead times, product range, processing capabilities,
distribution coverage and customer relationships (Deloitte 2008). Steel producers like Bisalloy, because of
product differentiation are able to gain the majority of the market share in their niche market, although this
limits market share growth in the Asia-Pacific industry.
There is an increasing trend for consolidation, with international mergers and/or acquisitions such as that of
Indian company, Tata Steel and European entity, Corus. Consolidation allows for increased economies of
scale, lowering production costs as well as expanding reach to new markets (Datamonitor 2010). As a result
of the acquisition of Corus by Tata Steel in 2007, Tata Steel has become one of the top ten steel producers in
the world. In Australia the merger of OneSteel and Smorgon Steel has increased efficiency and lower costs,
placing OneSteel in a better position to compete in the wider Asia-Pacific steel industry.
3.4 Industry Outlook
As a cyclical industry, the steel industry closely follows the business cycle of the greater economy.
Therefore, it is no surprise that the steel industry was adversely affected by the Global Financial Crisis which
lead to an economic downturn in most Asia-Pacific steel markets, with the exception of China. However, the
global economy now appears to be in a stage of recovery. The steel industry has benefited from this
24
economic expansion, and recovery has come about earlier and stronger than expected (WorldSteel 2010).
Demand for steel is expected to continue to strengthen as a result of global economic recovery, and global
steel production is forecasted to increase 6% this year (ABARE 2009).
Government stimulus packages has been the main driver of growth in steel demand, by investing in steel
intensive infrastructure projects designed to support steel consumption (ABARE 2010). In China the $633
billion fiscal stimulus packages (Callick 2010) has been focused on high infrastructure spending. Investment
in railways, bridges and freeways doubled in 2009 (ABARE 2009) and a number of large infrastructure
projects were brought forward (IMF 2010). Steel use in China increased by 35% in the infrastructure sector,
14% in residential construction and 41% in the automotive sector (Tulpule 2010). The expected overall effect
of this Chinese stimulus is an increase in steel consumption of 10% this year (ABARE 2009). The India
government is also investing in steel intensive infrastructure and this set to boost Indian production growth
by 9%.
As a result of the significant decline in steel production in 2009, in the first half of 2010 we have seen a jump
in growth, however this growth is set to slow in the second part of this year (ABARE 2010). There are two
main reasons for this trend. Firstly, the global and domestic inventory cycle has boosted production as
demand recovers in advanced economies (IMF 2010) after aggressive de-stocking of inventory holdings
during the Global Financial Crisis (Tulpule 2010). However this boost in growth is only short-term so once the
adjustment in inventories is over, growth in the later part of this year and 2011 is expected to moderate.
Secondly, improvement in economic activity has lead to the gradual withdrawal of government stimulus.
The impact on economic growth rates has ranged from between 0.5% to 2% in the Asia-Pacific region as
shown by figure 1.19 above from the IMFʼs Regional Economic Outlook Report (2010). Furthermore, steel
projects in developing countries are often pursued by the state, so there is great dependence on government
spending (Sato 2009). This will see economic growth in both developing and advanced economies start to
slow toward more sustainable levels in the latter part of this year and 2011 (RBA 2010) and the steel industry
will follow a similar pattern.
The high production and consumption levels of China, makes growth in the Asia-Pacific steel industry highly
dependent on Chinaʼs high level of growth continuing. Any rapid slowdown in Chinaʼs economy will have a
significant impact on domestic and Asia-Pacific steel markets (ABARE 2010). Therefore, unsurprisingly
recent news of economic slowdown in China has caused new uncertainty for the outlook of the steel industry.
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3
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-J?>?GG?DA:K#/?DL=GI<AK(=?B=D#-<IW?DMA#IP#&J?D=K#=DE#(J=?>=DE"
Figure 1.19 taken from IMF Regional Economic Outlook Report (2010) page 17
25
Chinaʼs slowdown has come about as a result of government measures to prevent the economy from
overheating(Sainsbury 2010) and there are fears this will result in larger than intended slowing in growth
(RBA 2010).
The initial impact on the steel industry in China has been weaker demand from the real estate market due to
tightened policy and less orders from automakers due to accumulation during the financial crisis. Historically,
construction accounts for 70% of Chinaʼs steel consumption, and demand is forecasted to decline further if
property prices fall due to macro controls (China Daily 2010). So far output from Chinaʼs large producers has
fallen by 3%, as steel prices have dropped and raw material prices are at record highs. Baosteel says the
outlook is grim for the remainder of 2010 (Sainsbury 2010).
Prices of raw material inputs needed for steel production, such as iron ore and metallurgical coal will also
impact growth levels in the steel industry. Commodity markets are entering a new age of volatility (Garnaut
2010) and raw material prices have recently experienced record highs (Callick 2010). This has been
attributed to the speed of demand growth relative to supply which experienced production cut-backs during
the Global Financial Crisis (Tulpule 2010). On the positive side for the steel industry, high iron ore and coal
prices are encouraging investment in new resource projects (BlueScope 2010; Purnell 2010) which will
increase supply capacity in the future and drive down prices. On the basis of an outlook of increased supply
and deceleration in commodity demand once inventory re-stocking slows, the RBA (2010) now anticipates
that contract prices for iron ore and coal will decline more quickly that first forecasted.
It is also thought steel makers throughout the Asia-Pacific region will benefit from Chinaʼs abolition of their
export tax rebate, easing the threat of Chinese imports (The National 2010). Furthermore, there is recent
speculation that steel production in China may slow down as the Government is looking to close down high
polluters (Evans 2010). This would have a negative impact on Australian miners of iron ore and coal,
however it may create an opportunity for Australian steel manufacturers whose exports would replace
domestic product.
3.5 Short-Term Industry Growth Projections
Based on the general economic and industry outlooks discussed above, the forecast for growth in the Asia-
Pacific industry is positive as highlighted by production and consumption growth for 2011. The main reasons
behind this optimistic outlook are the continued effects of Government stimulus; expectations of rapid GDP
growth in China and India and recovery of advanced economies; greater production of steel encouraged by
increasing steel prices as demand strengthens and a continued increase of capital inflows to Asia, boosting
investment. Short-term growth projections are as follows:
Steel Consumption
World steel consumption is forecasted to increase into 2012, although at a slower rate due to Chinaʼs
signaled intension to slow economic growth (ABARE 2010) but robust GDP growth is expected from China
over the next couple of years (The Nation 2010). In 2011, the majority of consumption growth will come from
developing Asia, driven by rising incomes and a growing urban middle class (ABARE 2010). In fact, China
will account for 45.5% of world steel consumption in 2011. However this figure is forecasted to be lower than
in 2009-10 (WorldSteel 2010) as a result of tightening fiscal and monetary policy and moderating growth
expected in advanced economies who are Chinaʼs key export markets. However, residential development in
China is expected to see steel consumption double in the construction sector from current levels by 2015
(Tulpule 2010).
Steel Production
World steel production is forecasted to increase by 7% in 2011, with the majority of growth expected from
China and India where steel production growth is expected to be around 10% and 9% respectively in 2011
(ABARE 2010). According to Datamonitor (2009), by 2013 the market value of the Asia-Pacific steel industry
is expected to have risen by 169.1% since 2009, representing a compound growth rate of 21.9%. In
26
Australia, the market value of the metals and mining industry in 2014 is expected to have risen 51.4% since
2009, but this will be driven primarily by the coal segment rather than steel (Datamonitor 2010).
The World Steel Association (2010) anticipate that steel production in Australia will grow significantly during
2010 and the start of 2011 with growth at 28.3%. Growth will then moderate to a compound rate of 7.8%
each year until 2015. However, industry growth will decline over the medium term to a long-term stable rate
between 3-4%. This projection is based on the industry and economic outlook discussed in the previous
sections, and a number of risks to high growth which are listed below.
27
4. Financial Statement & Company Risk Analysis
Comparative analysis of company financial statements can give further insight to the strengths and
weaknesses of the company in addition to the qualitative analysis carried out in the first section of this report.
This analysis will help identify whether Bisalloy has the ability to generate desirable return on equity (ROE)
into the foreseeable future as this will affect the companyʼs long-term sustainable growth rate, ROE and
overall valuation (Hitchner 2006). For this reason, in addition to operating profitability, business and financial
risk are also discussed.
For the purpose of carrying out a relative or comparative analysis, various financial ratios denoting Bisalloyʼs
position have been calculated overtime using financial statements from the past 5 financial years; 2005-06 to
2009-10 inclusive. Furthermore, financial ratios have been compared to four companies; OneSteel,
BlueScope, Bradken and Broadway Industries who are considered some of Bisalloyʼs closest peers. The
companies manufacture and sell similar products and it appears that customer demand comes from the
same industry sectors. Other competitors identified as the main competitors in the Asia-Pacific industry
analysis were not considered to be similar enough to be included in the peer group and different accounting
standards in these countries may cause financial ratios to become less meaningful when compared.
4.1 Bisalloy Peer Group Overview
OneSteel Limited
OneSteel manufactures and distributes steel products in Australia. Its products are used in similar
applications to Bisalloyʼs Q&T steel plate, including the construction, mining, rail and manufacturing sectors.
Products include rail, rod, bare, wire, pipe and tube steel products. They are also involved in the mining and
selling of iron ore, the raw material used for steel manufacturing (Deloitte 2008). As a result, while
OneSteelʼs product mix is more diversified, it still operates in the same industry as Bisalloy and services
similar industry sectors meaning both companies are theoretically exposed to the same business risk.
BlueScope Steel Limited
BlueScope is also an Australian company, who operates in both Australia and New Zealand. Their products
are using in the construction, manufacturing and automotive industries. BlueScopeʼs products include hot
and cold rolled coil, plate and coated products (Deloitte 2008). Furthermore, BlueScope provide
approximately 55% of Bisalloyʼs raw material inputs known as ʻgreenfeedʼ. In 2009, BlueScope was the 39th
largest steel producer thus is significantly larger than Bisalloy, mainly achieved by greater product
diversification (WorldSteel 2010).
Bradken Limited
Bisalloy is considered by ASX to be part of the GICS capital goods industry sector, which is part of the
greater industrials sector. For this reason, Bradken Limited has been selected as an appropriate peer despite
not being considered part of the steel industry like OneSteel and BlueScope. The company supplies
consumables to the mining and rail industries, and similar to Bisalloy, its designs and manufacturers wear
plate for earth moving equipment making it a close competitor of Bisalloy. In addition, the company has
divisions dedicated to mineral processing equipment, rail transport, industrial machinery and power and
cement machinery. They have operations in Australia, New Zealand and the United Kingdom.
Mercer Group Ltd (Formerly Broadway Industries Ltd)
Broadway Industries is an international peer, whose operations are based primarily in New Zealand. that
operate in New Zealand, Australia and the Middle East. The company now trades as part of the Mercer
Group that has additional operations in Australia and the Middle East. Their primary business is the
fabrication of stainless steel products, but they also produce specialist equipment and manufacture and
supply conveyers. Other also manufacture and distribute laundry tubs, sinks and related stainless steel
products. Although this company has a different product mix to Bisalloy, they still operate within the capital
28
goods industry. Broadway is approximately one fifth the size of Bisalloy based on market capitalisation,
whereas other peers are significantly larger than Bisalloy on this measure.
4.2 Extended Dupont Return on Equity
Return of equity (ROE) is a measure of the rate of return that management generates on share capital.
Therefore, ROE is considered as an important indicator of operating performance. The Dupont framework
used to calculate ROE provides insight to factors that affect ROE, including profitability, effective asset
management, shareholder returns and the effects of leverage and income tax (Hitchner 2006). Figure 12
below shows the components of the extended Dupont ROE framework.
Figure 12: Extended Dupont ROE Framework

Operating
Profit Margin
(EBIT/Net Sales)
Total Asset
Turnover
(Net Sales/Total
Assets)
Return on
Assets
(EBIT/Total
Assets)
Net Before
Tax / Total
Assets
Financial
Leverage
Multiplier
(Total Assets/
Common
Equity)
Net Before
Tax /
Common
Equity
Tax retention
rate
Return on
equity
Interest Expense
Rate (Interest
Expense/
Total Assets)
*Notes regarding Dupont ROE Calculation
• All figures sourced from companyʼs annual financial reports via company websites.
• Broadway Industries has not yet made their financial reports available for 2010. Furthermore, the
company did not make their income statements available prior to 2006, therefore ROE could not be
calculated for Broadway for the 2005-06 and 2009-10 financial years.
• Net sales have been used as opposed to gross sales, as it is felt that net sales is a better indicator of true
operating profit margins. Net Sales are based on revenue from operations only, therefore other revenues
have been excluded.
• The purpose of this analysis is to derive a foundation for future expected earnings, therefore the
discontinued operations were omitted from the figures in each year and not considered.
• Equity in this calculation refers to only common equity or shareholder capital. It should be noted when
comparing ROE results, that using total equity figures instead of common equity will dramatically alter
ROE results.
• The Dupont ROE inputs are shown in appendix 1.
29
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30
4.2.1 Operating Profit Margin
The operating profit margin is the ratio of earnings before interest and tax (EBIT) and net sales, which simply
demonstrates the relationship between sales and profit for a particular period. Therefore this measure
provides insight to the operating profitability of the company under analysis, without the impact of interest
expense and income tax. Therefore, without tax and interest, the volatility of operating profit can be
explained by cost of sales (COGS). It is desirable for EBIT/Net Sales to be as high, however this ratio should
not be looked at in isolation, because companies with high operating profits may have high expenses in
other areas such as investment or financing which will erode high operating profits.

Bisalloyʼs profit margins appear fairly constant over the 5 year period under review. In the last
financial year EBIT dropped significantly however this was directly related to a drop of similar
proportion in net sales, therefore operating profit dropped only 14%. However, despite the sharp
decline in sales Bisalloy still managed to outperform its peers.

Therefore, we donʼt feel any significant adjustment needs to be made to COGS in the future.
Furthermore, as approximately 80% of Bisalloyʼs operational costs are fixed, therefore once they are
back to optimal capacity utilisation as part of economic recovery post GFC, economies of scale will
allow increased EBIT, thus increasing operating profitability. Furthermore, if the planned Joint Venture
goes ahead in China, Bisalloy will be able to further increase economies of scale.

Interestingly, peer analysis shows that profit margins to be quite uniform over the long-term. As a
consequence, Bisalloy must ensure they can sustain their current profit margins over the long-term to
remain competitive in the highly competitive and price sensitive industry in which they operate.

The companyʼs average operating profit margin over the last 5 years is 85%, well above the industry
average of 68%.
4.2.3 Total Asset Turnover
Total asset turnover is the ratio of net sales to total assets. It is a measure of the amount of sales generated
for every dollars worth of assets, thus measures how effectively the business is using assets to generate
sales revenue. Therefore, based net sales, we can see how many times assets are ʻturned overʼ. Total asset
turnover and ROA (discussed below) do appear similar however there is a distinct difference. ROA is about
profitability, where high ROA is desirable. Conversely, Asset turnover is a measure of efficiency where a high
asset turnover rate suggests that assets are being used more productively and fewer assets are required to
generate sales revenue. However, if this figure is too high, the firm may not have enough assets grow
existing sales revenue.

Bisalloy's ratio lower than the average of its peers, however this average is driven upward by
Bradken and Broadway who product capital goods other than steel. Steel companies tend to have
high fixed costs associated with the nature of their operations, which means that when sales are
down they are not able to utilise the full capacity of their plant and equipment, which are their assets.
As a result, asset turnover tends to be lower which is reflected by the average asset turnover rates
of steel companies BlueScope, OneSteel and Bisalloy. In fact, OneSteel and BlueScopeʼs turnover
rate appears fairly stable so this may simply be a characteristic of companies in this industry for the
reasons stated above.

In 2009 Bisalloyʼs ratio improved to 0.61 from its 2008 ratio of 0.12 to be far superior to its peers.
slightly better then its peers. This was due to a 267% decline in total assets associated with
Bisalloyʼs divestment of its distribution subsidiary Atlas.

As discussed further below, it is anticipated that Bisalloyʼs asset turnover will improve as part of
continuation of economic recovery which should seem achieve capacity utilisation of existing
facilities.
31
4.2.3 Return on Assets
Return on total assets is the ratio of EBIT to Total Assets. Return on assets (ROA) measures operating profit
relative to the firms total assets, as a ratio of the firms inputs (assets) to outputs (profit). Therefore, it
indicates how effectively the company is using their assets to generate profits. Interest is a financing
expense, not an operating expense and tax will fluctuate overtime, therefore tax and interest expense are
excluded (Atrill 2006). For this reason the EBIT is considered more useful when comparing performance
overtime. It is desirable to have a high ROA.

Bisalloy outperformed the average of its peer in 2009-10, with ROA of 8.79% relative to the average
of its peers of 7.41% over the same period, therefore achieved superior asset utilisation in its
manufacturing operations.

In 2009 and 2008 Bisalloy also out performed the average of its peers with ratios of 58.85% and
11.2% compared to 4.26% and 8.82% respectively. The large in increase from 2008 to 2009 was due
to a 267% decline in total asset associated with Bisalloy divesting in its distribution subsidiary Atlas.

Prior to 2008 Bisalloy was outperformed by its peers. Furthermore, the reduction of assets in
2009-10 could be contributed to de-stocking of inventories in response to reduced demand as a
result of the financial crisis.

Based on company growth incentives planned over the next financial year, including launch of a new
product range and Joint Venture in China, it is thought that Bisalloyʼs total assets are set to increase.
However, these growth initiatives should have a positive impact on sales revenue. Therefore, while
total assets may increase, the negative impact to ROA will be offset by increasing EBIT. Over the
short-term it is thought ROA will increase as a result of economic expansion and associated growth
in steel production. However, in the long-term ROA will return to the companyʼs long-term average of
between 15-18%.
4.2.4 Interest Expense Rate
The interest expense rate is the ratio of interest expense to total assets. The ratio provides a measure of the
negative effect of financial leverage by looking at the effect of interest expense as a percentage of total
assets.

In 2010 and 2009 Bisalloy had interest expense as a percentage of total assets far greater than its
peers, 7.25% and 4.33% compared to a peer average of 1.17% and 2.59%. This is a negative result
as Bisalloy had a greater interest expense as a percentage of total assets. As financial risk will
demonstrate below, Bisalloy do carry more debt relative to their peers, so it is not surprising here
that they have a higher interest rate expense relative to their assets. This also increases exposure to
interest rate rises, which are projected for 2011 to 2012 and this will increase the companyʼs interest
expense rate.

In 2006 and 2007 Bisalloyʼs interest expense was again greater then itʼs peers, in 2006 it was almost
twice that of all its peers. So Bisalloy was paying a greater amount of interest relative to its total
assets. This is a poor result.

Under a scenario where interest rates are held constant, itʼs predicted that interest expense will not
increase significantly in the next few years as Bisalloy has negotiated a new agreement with GE
Commercial Australia, their principal financier. The deal means that Bisalloy will have access to
credit at a significantly lower cost then it has in the past until Oct 2012. Also they have reduced their
debt form 36.2 million at 30 June 09 to 18.1 million at 30 June 2010. A further reduction of debt
remains a key objective of the company.
4.2.5 Net Before Tax/ Total Assets
This ratio examines the return on assets prior to the effect of taxes. This is useful when comparing domestic
and international companyʼs which will be subject to different rates of taxation.
32

Prior to 2008 Bisalloy had a poor NPBT/Total Asset ratio, it was outperformed by all the peers.
Bisalloy was achieving ratios of 2006 to 2007 with ratios of 2.08% and 0.87% in 2006 and 2007,
compared to the average of it peers at 16.69% and 10.31% respectively.

Bisalloy experienced a positive result in 2009 by achieving a ratio of 54.52% when the average of its
peers was 1.78%. The large increase from 11.43% in 2008 to the large 2009 ratio was due to the
267% reduction is total asset value experiences in 2009.

The deduction in assets is largely due to Bisalloy divesting in its distribution subsidiary Atlas.

In 2010 Bisalloy's ratio decreased from 54.52% in 2009 to 1.54% a figure far less then the average
of its peers at 5.33%.

Itʼs predicted this ratio will increase over the next few years as Bisalloyʼs net before tax profit
increases due to the financial recovery whilst itʼs assets values remain steady.
4.2.6 Financial Leverage Multiplier
The Total Assets/Common equity ratio is also known as the financial leverage multiplier. It is a way of
examining how a company uses debt to finance its assets. It shows the companyʼs total assets per dollar of
common stock holdersʼ equity.

In 2010 Bisalloy had financial leverage multiplier of 0.735, that is for every dollar of common stock
holder equity Bisalloy had $0.74 worth of assets when on average it peers had $2.45 worth. This
suggests Bisalloy was using less debt then its peers to finance its assets. The decline from the 2009
figure is due to additional share capital raised August 2008.

Bisalloy had similar result in 2009 with a financial leverage multiplier of 0.907, when its peerʼs
multiplier was 2.59.

The larger financial leverage multiplier means generally means that a company has a higher reliance
on debt to finance their assets. An increase in debt decreases share holder equity while also makes
the stock more risky. However, all Bisalloy's peers had positive retained earning in 2010, if they
choice they could use this money to reduce debt, Bisalloy does not have this option as it had large
retained loss in 2010.

Bisalloy had lower leverage multiplier then its peers in 2010 and 2008 but it had large negative
retained earnings. Conversely, in 2006, 2007 and 2008 Bisalloy had a higher financial leverage
multiplier then all of its peers.

Totally equity increased from $6311000 in 2009 to $1187900 in 2010, contributed equity increased
from $60627000 in 2009 to $65539000. This is due to $4912000 share capital raised form an
unconditional placement of 28 million ordinary shares to existing sophisticated investors at $0.175
per share in August 2009.

The leverage multiplier is likely to remain constant or decrease as Bisalloy has an objective to further
decrease debt
4.2.7 Net Before Tax / Common Equity
This ratio represents return that common equity holders receive prior to the payment of tax. It gives an
indication of pre-tax return on equity.

In 2010 Bisalloy has a ratio of 1.16%, this is far less then itʼs peers average with a ratio of 14.17%,
however it must be noted that a very high ratio of 31.87 from Bradken pulled up the peer average. As
a result, Bisalloyʼs common equity holders received a lower net profit before tax return then its equity
holders in peer companies.

In both 2009 and 2008 Bisalloy far outperformed itʼs peers average with a ratio of 49.53% and
57.75% compared to 8.92% and 37.54% respectively.

It must be noted that in 2010 and 2009 Bisalloy had large negative retained earnings figures that
were 97% and 94% of contributed equity respectively. Retained earnings are the percentage of net
33
earning retained by the company. Positive retained earning can be used to pay dividends to share
holders, reinvest in the company, pay off debt or offset retained losses.

In both 2007 and 2006 Bisalloy was outperformed by all of its peers.

The ratio should increase over the next few years as net profit increase with the improvement in the
quench and tempered steel market.
4.2.8 Tax Retention Rate
The tax retention ratio is calculated using the formula: 1-(Income Tax / Net Before Tax). The ratio shows the
percentage of net income that is retained after paying income taxes. The higher the retention ratio the lower
the tax rate and vice versa.

In 2010 Bisalloy had a poor tax retention rate of 0.55 this was lower than each of its peers, so
Bisalloy was retaining less income after paying income taxes. This was largely due to a significant
decline in net profit before tax figure compared to previous periods.

In 2009 Bisalloy achieved a better result almost on par with the average of its peers, Bisalloy had a
tax retention rate of 0.77 compared to the average of its peers 0.87.

In both 2008 and 2007 Bisalloy had a tax retention rate lower then each of its peers. This is a poor
result as Bisalloy was retaining less of income after paying income taxes.

In 2006 Bisalloy had a slightly higher tax retention rate then the average of its peers.

Itʼs predicted that net profit before tax will increase, based on the future outlook for the company and
growth initiatives previously discussed, and as a result the tax retention ratio is expected to increase.
4.2.9 Return on Equity (ROE)*
Return on Equity (ROE) is a measure of the rate of return that management generates on capital provided by
common shareholders. Average ROE for the Dupont calculation period is shown below in figure 14 below.

In 2010 Bisalloy produce a poor ROE of 0.64% relative to the 11.21% average achieved by its peers.
Although it must be noted that a high figure of 23% from Bradken greatly increase the peer average,
if you take Bradken out of the equation the peer average would be 5% which is still higher than that
of Bisalloy.

Bisalloyʼs ROE is poorer than that of its peers as it was outperformed in both of the two components
that make up ROE, tax retention ratio and net before tax / common equity. The poor result was
largely due to a significant decline in net before tax from $30,029,000 in 2009 to $763,000 as well as
a 7.5% increase in common equity.

In 2009 Bisalloy had a ROE of 36.61%, this is a far greater figure then the average of its peer who
achieved an average result of 5.98%. Bisalloy also out performed itʼs peers in 2008 with a ROE of
37.43% compared to 24.84. In both years the positive results were because Bisalloy had greater net
profit before tax relative to its common equity value.

However, in 2007 and 2006 Bisalloy was outperformed by its peers. In 2007 this was largely due to
poor tax retention ratios and 2006 the poor performance was due to a low net before/common equity
ratio relative to its peers.

Itʼs expected that Bisalloyʼs ROE will increase in the next few years as the company reduces debt
and increase net profit before tax. However, the negative retained earnings will limit the benefit of
positive NPAT to equity holders in the immediate future, as NPAT is expected to be used to reduce
the retained loss rather than pay dividends. It is expected that a small dividend may be paid at the
end of the 2012 financial year, providing sales grow inline with steel production growth projections.
*Please see forecasted earnings for ROE of Bisalloyʼs continuing manufacturing/processing segment as
results are quite different to the ROE for the consolidated entity provided in this section.
34

Figure 14: Historical ROE Average (2005-06 to 2009-10)
4.3 Business Risk
Business risk refers to the uncertainty of operating income caused by the firms industry. To address business
risk we must look at variability in operating earnings. We know that earnings vary due to sales and costs.
Therefore, the volatility of firms operating income is due to two factors; the volatility of the firms sales
overtime and its operating leverage (Rielly & Brown 2009).
Bisalloy operates in a cyclical industry, thus is likely to have sales that are more volatile over the business
cycle. If this is the case, Bisalloy would have increased business risk. Furthermore, higher fixed costs
compared to variable costs will cause the firms earnings to vary more than the effect of sales. Thus, for a
cyclical industry like Bisalloy, it is preferable to have lower operating leverage, that is variable costs. Then,
during periods of contraction in the business cycle when sales are lower, operating costs are also lower,
reducing business risk or exposure to downturns in the business cycle.
Sales Variability & Operating Leverage
Business risk can be measured by a ratio of standard deviation of Operating Earnings and the average
operating earnings over the same period. Microsoft Excel has been used to calculate the mean and standard
deviation of Bisalloyʼs operating earnings over an 8 year period from 2002-03 to 2009-10. Broadway
Industries has been excluded from this analysis because data was not available for the company for some
financial years, reducing the relevance of the results.
In addition to calculating business risk, a measure of sales variability and operating leverage must also be
determined so we can decide which factor is more significant for Bisalloy. The variability of sales is measured
by the standard deviation of sales, divided by average sales. This has been calculated over the same period
as business risk above. The fixed production costs of the firm are referred to as operating leverage. Based
on the explanation of earnings volatility above, the higher the fixed costs, the less earnings will vary as a
function of sales. Operating leverage can be found by taking the absolute value of the average annual
percentage change in operating earnings relative to the percentage change in sales (Reilly & Brown 2009).
Calculation of sales variability and operating leverage reveals some interesting results, and demonstrates
the importance of understanding the components of business risk, because here both measures differ
significantly among this peer group. Company analysis previously revealed that 80% of Bisalloyʼs production
costs are fixed, so it is not surprising that operating leverage is a larger determinate of the companyʼs
business risk. OneSteel and Bradken have operating leverage at a similar level. BlueScope however, has
significantly higher operating leverage, which may be explained by more expansive production facilities and
operations in comparison to Bisalloy who operate a single production facility.
-13%
0%
13%
25%
38%
50%
Bisalloy OneSteel BlueScope Bradken Broadway Peer Average
35
Sales variability is lower for both OneSteel and BlueScope compared to Bisalloy and Bradken. This may be
because OneSteel and BlueScope have more diversified operations which gives them exposure to a larger
market. For example, OneSteel mines and trades iron ore as well as being a manufacturer of steel products.
Conversely, Bisalloy is a ʻone product companyʼ manufacturing only quenched and tempered steel, therefore
has a more limited niche market. As a result, Bisalloy has increased business risk compared to these
companies because it has ʻall its eggs in one basketʼ. However, it is anticipated that launch of Bisalloyʼs
extended product range in 2011 will reduce sales variability via access to new markets which are subject to
different supply and demand conditions.
Table 5: Business Risk Peer Comparison*
Bisalloy OneSteel BlueScope Bradken
BUSINESS RISK BUSINESS RISK BUSINESS RISK BUSINESS RISK BUSINESS RISK
Standard Deviation of OE= 7665372 173576766 404725978 57445110
Mean of OE= 18787000 427125000 998250000 87915250
Business Risk 40.8% 40.6% 40.5% 65.3%
SALES VARIABILITY SALES VARIABILITY SALES VARIABILITY SALES VARIABILITY SALES VARIABILITY
Standard Deviation of OR= 140,449,827 1,761,802,102 1,861,245,783 302,419,785
Mean of OR= 267,194,250 4,931,737,500 8,054,200,000 711,666,143
Sales Variability 52.6% 35.7% 23.1% 42.5%
OPERATING LEVERAGE OPERATING LEVERAGE OPERATING LEVERAGE OPERATING LEVERAGE OPERATING LEVERAGE
Sum % Change Ratio 24.5552 25.2205 145.3429 14.5426
Number of Periods 7.0 7.0 7.0 6.0
Operating Leverage 350.8% 360.3% 2,076.3% 242.4%
* Inputs to calculations shown in appendix ??
4.3 Financial Risk
The acceptable level of financial risk depends on the level of business risk. If a firm has relatively stable
operating earnings, then investors can accept higher financial risk. Financial risk refers to the additional risk
shareholders hold because of the nature of debt. Debt is a compulsory obligation rather than the residual
claim that shareholders have. Therefore, it is important to access the amount of long-term debt capital held
by the company and its interest obligations. On this basis, we have used the debt-equity ratio and interest
coverage ratio to access Bisalloyʼs financial risk. The computed long-term debt-equity and interest coverage
ratios for the peer group overtime are shown below. We feel that prudent valuations must consider the
financial risk of the company, especially since the Global Financial Crisis.
The results show Bisalloy and Bradken to have higher long-term debt-equity ratios. Furthermore, Bisalloyʼs
debt-equity ratio has fluctuated dramatically over the past 5 years. This reflects how the structure of
company liabilities has changed significantly in the last 3 years, shifting from short-term obligations to long-
term. Current liabilities are reduced by almost 62% to $18.57m compared to FY08-09, while non-current
liabilities went up from $0.37m in FY08-09 to $17.68m in FY09-10. Due to this fluctuation, we have
computed an average which is long-term debt-equity ratio of 101%, which is still very high compared to its
peers OneSteel and BlueScope, whose debt-equity average is half that of Bisalloy.
36
The interest coverage ratio shows how many times fixed interest charges are earned relative to the earnings
the company has available to pay that interest expense (Reilly & Brown 2009). Therefore, it is more
desirable to have a higher interest coverage ratio because this reflects the company has a higher proportion
of earnings to interest obligations. A lower interest coverage ratio means the company has a higher debt
burden. Bisalloyʼs interest coverage ratio for the last financial year was 1.21. This means that if Bisalloyʼs
earnings before interest and tax fell 17%, the company would be unable to meet its interest payments, and
consequently default on their loans. Bisalloyʼs average over the past 5 years is 2.09. Conversely, Bisalloyʼs
peers have much higher interest coverage, with ratios which average between 4 and 5. Thus, Bisalloyʼs
peers could afford earnings to fall by 75% to 80% before they were unable to meet interest payments.
Therefore, with interest rates due to rise over the next two years, Bisalloy are exposed to greater financial
risk. Fortunately, the negotiation of a new debt agreement through to October 2012 with GE should mitigate
some financial risk via debt cost reductions.
DEBT-EQUITY RATIO DEBT-EQUITY RATIO DEBT-EQUITY RATIO DEBT-EQUITY RATIO
Total Long-Term
Debt Total Equity
Debt-Equity
Ratio
2009-10
Bisalloy 17,683,000 11,879,000 149%
OneSteel 1,086,400,000 4,492,700,000 24%
BlueScope 1,440,600,000 5,755,700,000 25%
Bradken 321,965,000 471,708,000 68%
2008-09
Bisalloy 366,000 6,311,000 6%
OneSteel 1,435,400,000 4,336,300,000 33%
BlueScope 1,521,200,000 5,663,300,000 27%
Bradken 403,092,000 349,655,000 115%
2007-08
Bisalloy (Atlas) 1,580,000 -12,069,000 -13%
OneSteel 2,062,600,000 3,432,900,000 60%
BlueScope 1,404,100,000 3,941,800,000 36%
Bradken 265,524,000 187,588,000 142%
2006-07
Bisalloy (Atlas) 130,193,000 53,645,000 243%
OneSteel 1,011,600,000 1,650,000,000 61%
BlueScope 1,521,800,000 3,865,000,000 39%
Bradken 205,774,000 157,708,000 130%
2005-06
Bisalloy (Atlas) 84,901,000 58,077,000 146%
OneSteel 843,700,000 1,501,600,000 56%
BlueScope 1,915,700,000 3,084,900,000 62%
Bradken 135,887,000 135,202,000 101%
Average Debt-Equity Ratio Average Debt-Equity Ratio Average Debt-Equity Ratio Average Debt-Equity Ratio
Bisalloy 106% Bisalloy 106% Bisalloy 106% Bisalloy 106%
OneSteel 47% OneSteel 47% OneSteel 47% OneSteel 47%
BlueScope 38% BlueScope 38% BlueScope 38% BlueScope 38%
Bradken 111% Bradken 111% Bradken 111% Bradken 111%
37
INTEREST COVERAGE RATIO INTEREST COVERAGE RATIO INTEREST COVERAGE RATIO INTEREST COVERAGE RATIO
EBIT Interest Charges
Interest
Coverage Ratio
2009-10
Bisalloy 4,234,000 3,492,000 1.21
OneSteel 411,200,000 89,200,000 461%
BlueScope 233,000,000 112,100,000 208%
Bradken 136,043,000 30,484,000 446%
2008-09
Bisalloy 32,378,000 6,582,000 492%
OneSteel 351,900,000 172,200,000 204%
BlueScope 156,900,000 134,400,000 117%
Bradken 116,816,000 35,476,000 329%
2007-08
Bisalloy (Atlas) 23,670,000 14,567,000 162%
OneSteel 607,900,000 159,600,000 381%
BlueScope 1,065,300,000 131,200,000 812%
Bradken 103,614,000 20,065,000 516%
2006-07
Bisalloy (Atlas) 11,897,000 9,409,000 126%
OneSteel 337,600,000 55,800,000 605%
BlueScope 1,081,600,000 140,700,000 769%
Bradken 82,589,000 13,174,000 627%
2005-06
Bisalloy (Atlas) 14,080,000 9,795,000 144%
OneSteel 300,300,000 56,700,000 530%
BlueScope 718,700,000 90,000,000 799%
Bradken 59,878,000 11,939,000 502%
Average Interest Coverage Ratio Average Interest Coverage Ratio Average Interest Coverage Ratio Average Interest Coverage Ratio
Bisalloy 209% Bisalloy 209% Bisalloy 209% Bisalloy 209%
OneSteel 436% OneSteel 436% OneSteel 436% OneSteel 436%
BlueScope 541% BlueScope 541% BlueScope 541% BlueScope 541%
Bradken 484% Bradken 484% Bradken 484% Bradken 484%
38
5. Future Earnings for Bisalloy
5.1 Factors Affecting Earnings
There are a number of factors which may impact Bisalloyʼs future earnings, as highlighted in the economic,
industry and company analysis above. These factors are summarised below to provide a foundation on
which to estimate the future performance and growth of Bisalloyʼs future earnings. A stable growth rate can
then be derived for use in company valuation.
Global Economic Recovery
As a cyclical industry, the steel industry in which Bisalloy operates is expected to experience particularly high
growth in the second half of 2010 and continue well into 2011 as a result of economic expansion after the
Global Financial Crisis (Reilly & Brown 2009). Growth expectations are enhanced by the affects of
government stimulus into steel intensive projects and rebuilding of inventory levels after drastic de-stocking.
Steel Industry forecasts predict that production in Australia will grow from 6 million to 8.3 million tonnes of
crude steel over 2010 to 2014, with higher initial growth of 30% expected in 2010 through 2011, contributed
these factors (WorldSteel 2010). However as fiscal stimulus is withdrawn and inventory levels are rebuilt,
steel production will return to more sustainable levels in 2012 and beyond.
Economic expansion will impact Bisalloyʼs earnings for the 2010-11 and 2011-12 periods. We do anticipate
that in 2010-11 the company will not be operating at full capacity because of inventory de-stocking and other
onflow effects of the downturn in demand they experienced in 2009-10. Operating below optimal capacity
utilisation will increase the effects of operating leverage on revenue due to Bisalloyʼs high fixed costs.
However, improved demand over this period will allow the company to rebuild, consolidate operations and
reinvest positive NPAT in 2010-11, reaping earnings rewards in later periods. Thus we predict initial sales
growth in be lower, compared to 2011-2014 despite higher projections for industry growth in 2010-11.
Leverage to the Mining Sector
Bisalloyʼs customer segmentation shows approximately 70% of Bisplate consumption comes from the
Australian mining sector. It is anticipated that industrialisation and urbanisation of China, India and other
emerging economies will generate increasing demand for Australian resources following the downturn from
the Global Financial Crisis (Tulpule 2010). Thus, growth in the mining sector is expected to be stronger than
other sectors and high commodity contract prices continue to boost mining profits (RBA 2010).
As a result, investment into new mining projects like the $43 billion Gorgon LNG project is expected to grow.
This investment will allow resource companies re-instate their plans for new resource projects which were
delayed due to the financial crisis (BlueScope 2010). The level of outstanding mining construction is shown
on the graph below, which is consistent with forecasts that mining investment will increase by $60 billion in
2011 (Pradhan, 2010). The manufacturing sector will also benefit from the flow-on effects of the mining
boom, and could increase manufacturing investment by 20% (Evans 2010).
*Graph sourced from RBA August Monetary Policy Statement (2010)
28/09/10 10:57 AM RBA: SMP - Aug 2010-Graph 44
Page 1 of 1 http://www.rba.gov.au/publications/smp/2010/aug/graphs/graph-44.html
Graph 44
39
Therefore, it is anticipated that the during the construction stage of these new resource projects (2011-2013),
demand for Bisalloyʼs steel plate will increase significantly, for use in construction of facilities and from major
customers, like Caterpillar who manufacturer cranes and earth moving equipment used by mining and
construction sectors. Thus, this will lead to higher earnings in 2011 to 2013 periods.
Exports to Armour Manufacturers
Approximately 30% of Bisalloyʼs revenue comes from exports, where a large proportion of exports go to
international armour manufacturers. Bisalloy claim to hold a distinct competitive advantage as Australiaʼs
sole manufacturer of high hardness steel plate products for military applications (Steel Australia 2010).
Recently, governments in the US, India, Middle East and Asia have qualified Bisalloyʼs armour plate for use
by their militaries. As a result, company exports are expected to increase. Furthermore, the ongoing conflict
in Iraq and Afghanistan has seen the Australian Army to order 1300 new vehicles to replace their aging four-
wheel drive vehicles which should see an increase in domestic orders for armour plate (Steel Australia
2010).
As a result of orders from domestic armour manufacturers, Bisalloy should see an increase in 2010-11
earnings as an indirect effect of the Australian Army order. The impact of international government approval
of Bisalloyʼs armour plate is expected to help sustain higher earnings over the medium-term, as long as the
war in the Middle East continues.
Access to China & Asiaʼs Emerging Economies
In 2011, the majority of consumption growth will come from developing Asia, driven by rising incomes and a
growing urban middle class (ABARE 2010). Joint ventures with distributors PT Bima Bisalloy and Bisalloy
Thailand and a new joint venture with a China will provide Bisalloy with access to these high growth Asian
markets. Furthermore, Bisalloyʼs customer Caterpillar is a major player in China, underpinning Bisalloyʼs
access to the Chinese market which is expected to consume 45% of world steel production in 2011.
However, Chinaʼs recent implementation of tightened monetary policy has seen a sharp slowdown in the
Chinese economy and this is may slow growth in the Asia-Pacific steel industry.
Yet, there is speculation that the Chinese Government will close a number of high polluting steel producers.
This will reduce supply, creating opportunities for Australian producers of higher quality steel products like
Bisalloy. On the assumption that Bisalloy finalise their planned Chinese joint-venture in 2011, Bisalloyʼs
earnings should see an increase in sales beyond 2011 to be sustained long-term based on strong growth
projections for Asia-Pacific steel consumption, needed for urbanisation where there is reportedly a large
Q&T steel market.
Company Growth Initiatives
In their 2009-10 financial report, Bisalloy made note of the following growth initiatives they plan to implement
over the next between 2010 and 2012.

Increased production capacity: Bisalloy plan to set up a strategic alliance or collaborative association
where they hope to increase production capacity by sharing their unique Q&T production process. The
launch of a new joint venture in China will also increase future production capacity so Bisalloy can
exploit the large market for Q&T steel plate in the Asia-Pacific. For the purposes of this valuation, it is
assumed the joint venture will go ahead in late 2011, therefore increasing earnings potential for the
2011-12 period and beyond with overhead costs reduced via economies of scale.

Extended product range: In 2011, Bisalloy plan to roll-out a number of new wear plate products to
expand their existing product range and diversify their product portfolio in response to market demand.

New procurement strategy: Bisalloy plan to expand their current supplier base for raw material known
as ʻgreen feedʼ to a mix of both domestic and overseas suppliers to reduce raw material costs and risk
of reliance on dominant supplier, BlueScope Steel. For the purposes of this valuation, it is assumed
that a new procurement strategy will be in place by mid 2011, lowering COGS for the 2011-12 period
and beyond.
40
Risks to Future Earnings
The current steel industry outlook is very optimistic. This is closely linked to the current post-crisis expansion
stage of the business cycle we are in, which is mirrored in the steel industry due to its cyclical nature.
Furthermore, because economic recovery has come about faster than expected, the earnings forecasts of
many steel companies have been upgraded, including Bisalloy. Yet, there are still a number of risks to this
short-term outlook, which may lead to actual steel production and consumption being less than first expected
over the forecast period.
There is no doubt that the gradual withdrawal of fiscal and monetary stimulus will result in a lower level and
pace of economic growth over the medium to long-term is likely to cool demand for steel products.
Deceleration in demand for steel once inventory levels are rebuilt after Global Financial Crisis provides
another reason why it is likely that steel consumption and production will fall in 2012 (Tulpule 2010). This is
one reason why, inline with industry and the wider economic forecast, high earnings growth cannot be
sustained over the long-term.
There are also fears in the steel industry that Chinaʼs tightening of monetary and lending policy in response
to inflation will slow growth more than expected (IMF 2010). The reason for this decision by the Chinese
Government is that that rapid growth may cause China and other emerging economies in the region to
overheat, increasing vulnerability to credit and asset prices (IMF 2010). Also, the current outlook for
advanced economies is uncertain and slower than expected recovery in advanced economies puts Asia-
Pacific growth at risk because of their reliance on export demand from countries like the United States
(Callick 2010). Fortunately, the majority of Bisalloyʼs sales come from the domestic market so the risk on
their earnings is reduced.
Despite this fact, slowed economic growth in China and the greater Asia-Pacific has two possible
consequences for Bisalloy. The worst case would be that the Chinese Joint Venture would be further
delayed, due negative sentiment held by Chinese steel manufacturers about the business environment. The
second scenario would be that slower economic growth would reduce profitability of the companyʼs existing
Indonesia and Thai joint ventures. This may require earnings to be downgraded if one of these scenarios is
realised. On the upside, despite cooling, the Chinese economy is still expected to have strong demand for
steel over the long-term. The company should also benefit from this urbanisation in China even if the joint
venture does not go ahead because of increased demand for Q&T wear plate from Caterpillar, who account
for a large proportion of Bisalloyʼs sales and already have strong presence in the Chinese market.
The other risk to Bisalloyʼs earnings outlook comes from steel input costs, although the impact is indirect as
Bisalloy do not manufacture their product from raw mineral products like iron ore and coal.The introduction of
stricter environmental standards as a consequence of climate change will increase costs of production and
weigh on steel prices and may negatively impact Bisalloyʼs operating profit margin unless they can negotiate
desirable trading terms with their suppliers (IMF 2010). Furthermore, a new pricing system for steel raw
materials, like iron ore and coal has been implemented. Prices of such minerals are now set on a quarterly
basis instead of an annual contract, and this is thought to increase price volatility, affecting the cost of steel
production inputs (ABARE 2010). However, this will have an indirect impact on Bisalloy. Finally, the
resources rent tax, has caused a lot of uncertainty on the outlook for raw material prices, but if imposed by
the Australian Government it is likely to increase prices. The tax may also reduce investment in mining
projects, compromising Bisalloyʼs future economic benefit from mining construction. At this time, the details
of the tax and whether it will be implemented are still unknown.
Finally, risk analysis shows Bisalloy has high financial risk relative to its peers. Because the company has
undergone major change in the past 2 years, with the sale of its distribution business, focus should be on the
past 2009-10 financial year, which provides us the best picture of the financial position of the company today.
Thus, with a long-term debt-equity ratio of 149% and interest coverage ratio of only 1.21 it is clear Bisalloy
holds significantly more financial risk at this present time relative to its peers. Therefore, Bisalloy is exposed
41
to interest rate rises which are predicted in 2011, which will increase the companyʼs interest expense and
reduce NPAT.
5.2 Bisalloy Earnings Forecast
As previously discussed, while the economic and industry outlook is largely positive over the short to
medium-term, the long-term economic situation is uncertain. Therefore, ordinarily it would be imprudent to
forecast beyond 3-5 years in this current economic climate. However, for the purposes of company valuation
we must make some long-term assumptions in order to derive valuation variables that are considered to be
stable and constant over the long-term. As companies are unable to sustain long-term growth above the
GDP average, the long-term growth rate for the company will be between 3 and 4%, based on historical
GDP trends (EconomyWatch.com 2010).
5.2.1 Implied Long-Term Growth
The rate of long-term earnings growth is based purely on Bisalloyʼs historical earnings, where it is assumed
that future earnings will follow the general trend of historical earnings. The ability to forecast a companyʼs fair
value with accuracy comes down to the valuerʼs ability to forecast future expected cash flows (Rielly & Brown
2009). This is a challenging task for a company like Bisalloy who has undergone significant change since
being listed as a public company and floated on the ASX. While the previous ROE calculation considered
only financials of continuing operations in each year, these results were a hybrid of both distribution and
manufacturing activities until 2009 and 2010.
Now that the distribution side of the business has been sold, future expected cash flows will only come from
the manufacturing/processing activities. Furthermore, due to the unprofitability of the distribution business,
consolidated operating revenue is poor for most periods, while the manufacturing segment. Therefore, it was
felt historical data would be more useful to forecast future cash flows where sales, EBITDA and assets were
came from the continuing manufacturing segment of the Atlas business, rather than a consolidation of all
segments. Table 6 below shows this adjustment based on business segment figures taken from Bisalloyʼs
annual reports. A long-term historical trend will be derived on this basis.
Table 6: Segmented Financial Results & Estimated ROE (2004-2010)*
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Manufacturing/ Processing Segment Results ($‘000) Manufacturing/ Processing Segment Results ($‘000) Manufacturing/ Processing Segment Results ($‘000) Manufacturing/ Processing Segment Results ($‘000) Manufacturing/ Processing Segment Results ($‘000) Manufacturing/ Processing Segment Results ($‘000) Manufacturing/ Processing Segment Results ($‘000)
Gross Operating Revenue 66138 84894 99467 127630 108916 87621
EBITDA (Net Sales) 13022 18619 15821 29029 32411 5138
Total Assets 61273 59004 65085 60714 55019 48148
Depreciation 1225 1180 1302 1214 1179 904
EBIT 11796.54 17438.92 14519.30 27814.72 31232.00 4234.00
Interest Expense 753.9738 1078.0401 916.0359 1680.7791 2,382 3492
NPBT 11043 16361 13603 26134 28,850 742
Operating Profit Margin 90.59% 93.66% 91.77% 95.82% 96.36% 82.41%
Total Asset Turnover 0.21 0.32 0.24 0.48 0.59 0.11
Interest Expense Rate 1.23% 1.83% 1.41% 2.77% 4.33% 7.25%
Return on Total Assets 19.25% 29.56% 22.31% 45.81% 56.77% 8.79%
NPBT/Total Assets 18.02% 27.73% 20.90% 43.04% 52.44% 1.54%
42
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Common Equity 34,996.00 38,168 40,205 40,933 60,627 65,539
Financial Leverage Multiplier 1.75 1.55 1.62 1.48 0.91 0.73
NPBT/Common Equity 31.55% 42.87% 33.83% 63.85% 47.59% 1.13%
Tax Retension Rate 0.66 0.66 0.66 0.66 0.66 0.66
Return on Equity (ROE) 20.83% 28.29% 22.33% 42.14% 31.41% 0.75%
NOTES
*Operating Revenue excludes inter-segment sales, as the consolidated results of Bisalloyʼs financial statements eliminated inter-
segment revenue prior to calculating EBITDA.
* Depreciation expense has been calculated for the manufacturing segment based on average per annum depreciation expense of 2%
of EBITDA based on depreciation expense for 2009 and 2010 post-sale of distribution business and amortisation expense is assumed
to be zero.
* Interest Expense assumed to be constant at 5.79% of EBITDA which is an average of 2009 and 2010 periods post-sale of distribution
business
* Average overtime tax retension rate of 0.66 has been used, therefore removes the impact of tax from final ROE
The long-term trend of operating revenue is denoted by the equation y=5932.7x + 75013, as shown on figure
15 below. We can see there is a positive trend of increasing operating revenue over the past 6 years, with
the exception of 2009-10 where operating revenue was substantially lower due to the Global Economic
Crisis. The average operating revenue growth is equal to 2.8%, we will use 3% as as a proxy for long-term
earnings growth. On this basis, following the same assumptions made above, we can compute ROE for
when growth is assumed to be constant. This ROE can then be used as part of the formula g =RR x ROE to
estimate future dividend growth for use in the Dividend Discount Model (DDM).
5.2.2 Short to Medium-Term Growth
Obviously the implied long-term growth rate of 3% does not take into consideration the impact of economic,
industry or company developments or growth initiatives. These factors can lead to periods of accelerated
growth outside of any long-term trend. The key factors or issues thought to have impact on Bisalloyʼs future
earnings were discussed above in section 5.1.
Our method of estimating short to medium-term growth is based on steel production forecasts. Regression
analysis was carried out, where Bisalloyʼs growth in historical gross operating revenue was regressed
0
32500
65000
97500
130000
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
0%
12.50%
25.00%
37.50%
50.00%
y = 5932.7x + 75013
Figure 15: Historical Operating Revenue Growth Trend
Gross Operating Revenue Linear.(Gross Operating Revenue) Return on Equity (ROE)
43
against historical steel production figures (see Excel Output in appendix 2). This shows there is a significant
relationship between the two variables. Because we are confident with our steel production forecasts for
Australia, we will use forecasted steel production to guide Bisalloyʼs operating revenue growth.
Steel Production Growth Assumptions
Forecasts from the World Steel Association as identified in industry analysis (see section 3.4), expect the
following levels of steel production:

In 2010 Australian steel production will grow from 6 million tonnes (2009 figure) to 7.7 tonnes.

From 2011 to 2014 steel production will grow to 8.3 million tonnes.

From 2015 to 2018 it is believed based on current economic projections, that steel production will
decline approximately 5% each year until it reaches Australiaʼs long-term average production of 6.8
tonnes.
Three economic rationales were developed, in addition to long-term constant growth; recovery, growth and
stabilisation. Bisalloyʼs performance under each rationale is based on historical performance under similar
conditions, calculated using the regression model y=0.00023x-1.52119 where x is forecasted steel
production. However the regression model was just a starting point for calculation of ROE. In addition to this,
adjustments have been made to revenue growth figures based on the factors previously discussed in section
5.1. In the end, using the same approach as for calculating long-term growth, these ROE figures will be used
as part of the g =RR x ROE formula to predict dividend growth under each economic scenario in section 7.1.
Ffuture earnings have been estimated as follows in table 7 below.
Table 7: Estimated Short to Medium-Term Earnings for Bisalloy
2009-10 2010-11F 2011-14F 2015-2017F 2018 Onwards
Phase Notes Downturn Recovery Growth Stabilise
Constant
Estimated Revenue Growth 1 -20% 24.00% 39.00% 13.00% 3.00%
Operating Revenue (Sales) 87,621,000 108,650,040 121,793,190 122,774,545 90,249,630
Operating Expenses (Cost of Sales) 2 -82,483,000 97,785,036 97,434,552 98,219,636 72,199,704
EBITDA 5,138,000 10,865,004 24,358,638 24,554,909 18,049,926
Depreciation 3 - 904,000.00 -1,135,393 - 1,272,738.84 -1,282,994 -943,109
EBIT 4,234,000 9,729,611 23,085,899 23,271,915 17,106,817
Interest Expense 4 -3,492,000 -4,183,027 - 4,689,037.82 -4,389,190 -2,978,238
PreTax Profit 763,000 5,546,585 18,396,861 18,882,725 14,128,580
Tax Expense 5 -346,000 -2,218,634 - 6,438,901 - 6,136,886 - 4,238,574
NPAT 417,000 3,327,951 11,957,960 12,745,839 9,890,006
Total Assets 6 48,148,000 59,757,522 66,986,255 67,526,000 49,637,297
NOTES
1. Revenue growth calculated using regression model y= 0.00023x-1.52119 on which adjustments have been made subject to economic or company factors 1. Revenue growth calculated using regression model y= 0.00023x-1.52119 on which adjustments have been made subject to economic or company factors 1. Revenue growth calculated using regression model y= 0.00023x-1.52119 on which adjustments have been made subject to economic or company factors 1. Revenue growth calculated using regression model y= 0.00023x-1.52119 on which adjustments have been made subject to economic or company factors 1. Revenue growth calculated using regression model y= 0.00023x-1.52119 on which adjustments have been made subject to economic or company factors 1. Revenue growth calculated using regression model y= 0.00023x-1.52119 on which adjustments have been made subject to economic or company factors 1. Revenue growth calculated using regression model y= 0.00023x-1.52119 on which adjustments have been made subject to economic or company factors
2. COGS long-term average is 80% of Gross Sales. COGS will increase as sales decline due to lower capacity utilisation. For this reason COGS will be
lower in 2011-2014 compared to 2009 in addition to economies of scale achieved via entry to Chinese market via joint venture.
2. COGS long-term average is 80% of Gross Sales. COGS will increase as sales decline due to lower capacity utilisation. For this reason COGS will be
lower in 2011-2014 compared to 2009 in addition to economies of scale achieved via entry to Chinese market via joint venture.
2. COGS long-term average is 80% of Gross Sales. COGS will increase as sales decline due to lower capacity utilisation. For this reason COGS will be
lower in 2011-2014 compared to 2009 in addition to economies of scale achieved via entry to Chinese market via joint venture.
2. COGS long-term average is 80% of Gross Sales. COGS will increase as sales decline due to lower capacity utilisation. For this reason COGS will be
lower in 2011-2014 compared to 2009 in addition to economies of scale achieved via entry to Chinese market via joint venture.
2. COGS long-term average is 80% of Gross Sales. COGS will increase as sales decline due to lower capacity utilisation. For this reason COGS will be
lower in 2011-2014 compared to 2009 in addition to economies of scale achieved via entry to Chinese market via joint venture.
2. COGS long-term average is 80% of Gross Sales. COGS will increase as sales decline due to lower capacity utilisation. For this reason COGS will be
lower in 2011-2014 compared to 2009 in addition to economies of scale achieved via entry to Chinese market via joint venture.
2. COGS long-term average is 80% of Gross Sales. COGS will increase as sales decline due to lower capacity utilisation. For this reason COGS will be
lower in 2011-2014 compared to 2009 in addition to economies of scale achieved via entry to Chinese market via joint venture.
3. Depreciation has been calculated using historical average of 2% of Total Assets! 3. Depreciation has been calculated using historical average of 2% of Total Assets! 3. Depreciation has been calculated using historical average of 2% of Total Assets! 3. Depreciation has been calculated using historical average of 2% of Total Assets! 3. Depreciation has been calculated using historical average of 2% of Total Assets! 3. Depreciation has been calculated using historical average of 2% of Total Assets! 3. Depreciation has been calculated using historical average of 2% of Total Assets!
4. The interest expense for past financial year is 7.25%, however this is thought to decline by 1% pa due new debt agreement, however this will be offset by
expected interest rate rises in 2011 and 2012, thus decline is thought to be only 0.5%. Over the long term this will drop to 6%.
4. The interest expense for past financial year is 7.25%, however this is thought to decline by 1% pa due new debt agreement, however this will be offset by
expected interest rate rises in 2011 and 2012, thus decline is thought to be only 0.5%. Over the long term this will drop to 6%.
4. The interest expense for past financial year is 7.25%, however this is thought to decline by 1% pa due new debt agreement, however this will be offset by
expected interest rate rises in 2011 and 2012, thus decline is thought to be only 0.5%. Over the long term this will drop to 6%.
4. The interest expense for past financial year is 7.25%, however this is thought to decline by 1% pa due new debt agreement, however this will be offset by
expected interest rate rises in 2011 and 2012, thus decline is thought to be only 0.5%. Over the long term this will drop to 6%.
4. The interest expense for past financial year is 7.25%, however this is thought to decline by 1% pa due new debt agreement, however this will be offset by
expected interest rate rises in 2011 and 2012, thus decline is thought to be only 0.5%. Over the long term this will drop to 6%.
4. The interest expense for past financial year is 7.25%, however this is thought to decline by 1% pa due new debt agreement, however this will be offset by
expected interest rate rises in 2011 and 2012, thus decline is thought to be only 0.5%. Over the long term this will drop to 6%.
4. The interest expense for past financial year is 7.25%, however this is thought to decline by 1% pa due new debt agreement, however this will be offset by
expected interest rate rises in 2011 and 2012, thus decline is thought to be only 0.5%. Over the long term this will drop to 6%.
5. Tax Retention rate is expected to increase gradually increase from 0.65 in 2011-2014 to 0.7 in 2015 onwards 5. Tax Retention rate is expected to increase gradually increase from 0.65 in 2011-2014 to 0.7 in 2015 onwards 5. Tax Retention rate is expected to increase gradually increase from 0.65 in 2011-2014 to 0.7 in 2015 onwards 5. Tax Retention rate is expected to increase gradually increase from 0.65 in 2011-2014 to 0.7 in 2015 onwards 5. Tax Retention rate is expected to increase gradually increase from 0.65 in 2011-2014 to 0.7 in 2015 onwards 5. Tax Retention rate is expected to increase gradually increase from 0.65 in 2011-2014 to 0.7 in 2015 onwards 5. Tax Retention rate is expected to increase gradually increase from 0.65 in 2011-2014 to 0.7 in 2015 onwards
6. It is assumed the current asset to sales ratio of 0.55 will remain the same over the forecast period due to no indication Bisalloy will increase Total Assets 6. It is assumed the current asset to sales ratio of 0.55 will remain the same over the forecast period due to no indication Bisalloy will increase Total Assets 6. It is assumed the current asset to sales ratio of 0.55 will remain the same over the forecast period due to no indication Bisalloy will increase Total Assets 6. It is assumed the current asset to sales ratio of 0.55 will remain the same over the forecast period due to no indication Bisalloy will increase Total Assets 6. It is assumed the current asset to sales ratio of 0.55 will remain the same over the forecast period due to no indication Bisalloy will increase Total Assets 6. It is assumed the current asset to sales ratio of 0.55 will remain the same over the forecast period due to no indication Bisalloy will increase Total Assets 6. It is assumed the current asset to sales ratio of 0.55 will remain the same over the forecast period due to no indication Bisalloy will increase Total Assets
44
6. Valuation Assumptions
6.1 The Required Rate of Return (r)
The required rate of return (r) on the Bisalloy Stock has been calculated using the CAPM. The capital asset
pricing model (CAPM) extends the Markowitz portfolio theory by the introduction of a risk-free asset (Reilly &
Brown 2009). Cuthbertson and Nitzsche (2008) explain the CAPM as being made up of three components; a
risk-free rate (Rf), a market risk premium (the difference between market rate (Rm) and risk-free rate(Rf)) and
the impact these factors have on the systematic risk of an individual asset known as its beta value (βi). This
is shown in the CAPM equation below:
Total risk of an asset includes both systematic risk and non-systematic risk. Systematic risk represents the
economic factors that influence all stocks, such as changes in interest rates. Non-systematic risk
encompasses random events specific to an individual firm or industry, including an increase in sales or
competitor exiting the market (Cuthbertson & Nitzsche 2008).
The CAPM only quantifies systematic risk because of the assumption that investors can eliminate non-
systematic risk by holding well-diversified portfolios, where movements in negatively correlated assets offset
each other (Hitchner 2006). Furthermore, the risk-free rate of return and market risk premium are common to
all assets. So according to the CAPM, the only explanation for the variance of returns in different assets is
the beta coefficient (βi) therefore it can be used as a measure of how the returns of an individual asset and
the market move together (Koller, Goedhart & Wessels 2005). This is shown by the equation below:
6.1.1 Beta (β) Estimation
Beta is unknown and cannot be observed directly, so must be estimated (Koller, Goedhart & Wessels 2005).
Therefore, for the purpose of valuing Bisalloy, the value of beta was found by estimating the market model
via regression analysis in Microsoft Excel. This will provide a raw beta value which can then be improved by
using industry comparables and smoothing techniques (Koller, Goedhart & Wessels 2005).
Method
The first step was to calculate the monthly returns of the market and the individual stock price indices for a
five year period, 23/08/2005 to 23/08/2010, and these were denoted as Rm and Ri respectively. Returns were
calculated using the following log return equation:
Five years was considered an appropriate time period because it is characterised by large return volatility,
over a significant period. The selected sample prices on which monthly returns were calculated were taken
from the S&P/ASX 200 index and the Bisalloy Steel Group Ltd (BIS) price index. The ASX 200 index is a
weighted index and a major stock price index in Australia, which reflects general trends of the Australian
stock market, therefore was used is the proxy for the return on the market portfolio. The next step was to
estimate the market model using the regression tool in Microsoft Excel. The Market Model equation for the
population slope is shown below:
However, as we are working with a sample, b0 and b1 will be used to estimate the population parameters β0
and β1 shown in the equation above. As a result the format of our estimated Market Model will be:
45
Results
The returns calculated on the market (Rm) and stock prices (Ri) for the period 23/08/2005 to 23/08/2010. The
average of the market and stock returns was 0.335% and (-3.04%) respectively. The standard deviation of
the market was 5.72% and 14.93% for the stock returns.
By graphing Rm and Ri for the period 23/08/2005 to 23/08/2010, there is evidence of a positive linear
relationship between the market and the stock returns as shown in figure 16 below.
Figure 16: The Characteristic Line of Bisalloy Stock
The equation for the single-factor Market Model (CAPM) was estimated to be:
To check the model fit, the statistics of the estimation of the Market Model (CAPM) above were analysed
(see table 8 below). The full Excel output is shown in appendix 3.
Table 8: Statistics of Estimation of Market Model Equation
Coefficient bo b1
Value -3.3299 0.8731
p-value 0.0724 0.0084
Standard error 14.19 14.19
Adjusted R
2
0.0969 0.0969
F-statistic: p-value 0.0084 0.0084
Multiple R 0.3346 0.3346
R Square 0.1120 0.1120
The mean of y (Ri) for the sample is -303.75% and the SE is 14.19% therefore the error in the predicted
value of y is small compared to the mean, and indicates a good fit. The coefficient of correlation shown as
ʻMultiple Rʼ is only 33.46% which shows a relatively weak relationship between the two variables and weak
linear relationship. Because the coefficient of correlation can be over optimistic, we also considered the
adjusted figure.
The adjusted R
2
indicates the percentage of variability in y as explained by x. A result closer to 1 means a
better fit, and closer to zero means a poor fit. Here the adjusted R
2
is 9.69%. From this we can conclude that
only 9.69% of the variability in y is explained by x. This result is supported by the coefficient of determination
shown as ʻR Squareʼ which shows that only 11.20% of variation from the mean is explained by the linear
relationship and 88.8% is unexplained.
46
To test the population slope, and how well the sample model represents the population model we used the p-
value approach. Here the p-value is 0.0084(<0.05) therefore we can reject the null hypothesis H0: β1=0. This
means the relationship between x and y is significant.
Furthermore, the slope (b1) is positive, therefore the returns of the company stock move in the same direction
as the market portfolio. This satisfies the theory that returns of individual shares move in the same direction
as the market. Because b1= 0.8731, therefore if the market moves by +1, the return of the stock will rise by
0.8731. The estimated market model as shown above shows that b1 is significant.
Beta Adjustments
Using the modified empirical rule, we can state that with 95% confidence that Bisalloyʼs true beta will lie
between ±2 standard errors of 0.3201. Therefore, Bisalloyʼs true beta will lie between 0.2329 and 1.5133.
However this is a very large range of values. Therefore, we will improve our raw beta estimate via
comparison to the industry beta and smoothing techniques.

Smoothing
Smoothing is used to reduce beta estimate error. Here, the raw beta produced by regression is weighted
according to the standard error of the regression model. The smaller the standard error of the beta
coefficient, the more weight given to the raw beta. The formula used to smooth the raw beta calculated for
Bisalloy is shown below.
The results show our adjusted beta to be approximately equal to 1. This demonstrates that our regression
analysis provides little meaningful results according to Koller, Goedhart and Wessels (2005). We then tried
another smoothing technique is that used by Bloomberg as shown below. This provides an adjusted beta still
close to 1 at 0.9150. Therefore, on this basis, the Bisalloy stock moves almost identically to the market proxy,
and figure 1 in section 1.3 disputes this.
Industry Comparison
An alternative method of beta adjustment is based on industry comparison. The beta for Bisalloyʼs industry is
1.73 according to a number of sources (Reuters, Aspect Huntley and Bloomberg as at 18 September 2010).
Industry comparison is relevant because companies in the same industry are subject to similar operating
risk. Hitchner (2006) also states with much confidence that a companyʼs beta tends to move toward the
industry beta over the long-term. Thus, we can assume Bisalloyʼs raw beta to be 0.8731, will move closer to
1.73 overtime. Because valuation models used in latter sections are based on a long-term outlook, we feel
an appropriate beta for the purposes of future valuation should take an average of Bisalloyʼs raw beta and
the industry beta, to give us an adjusted beta of 1.284. This is thought to be a better adjusted beta value
than that computed by smoothing techniques because it considers a future outlook, rather than historical
data in isolation.
47
It should also be noted that various sources provided conflicting beta values for Bisalloy ranging from 0.66 to
2.00. However, we do not know for sure how such betas have been calculated, or know what market proxy
and time period the calculation has used. Therefore, comparing our results to these betas does not give us
any insight to the accuracy of our beta calculation and adjustment. Despite this, we are confident that the
beta value we have estimated is appropriate for Bisalloy and best reflects what we believe Bisalloyʼs future
share price performance to be relative to the market. That is, because we consider Bisalloy to hold more risk
relative to the market, when the market return fluctuates by 1, Bisalloyʼs expected return will fluctuate by
1.284.
6.1.2 CAPM Calculation
The formula for the CAPM is shown below.
The variables that will be used in the calculation of the estimated required rate of return for the Bisalloy stock
are as follows:

Risk free rate of return (Rf): The yield on 10 year Australian Government bonds will be used as a
proxy for the risk-free rate. The monthly return on the 10-year bond for August 2010, taken from the
RBA (2010) was 4.98% and this will be used as Rf.

Rate of return of market portfolio (Rm): Our economic analysis showed that the return of the
market is highly correlated with changes in GDP. Therefore, we have computed the return of the
market based on the probability of different economic scenarios and estimated market returns under
these conditions. The resulting E(Rm) is 11.5% as shown by table 4 in section 2.3.

Beta (βi): Based on our beta estimations above, an adjusted beta of 1.284 will be used.
Bisalloyʼs Required Rate of Return (RRR)
6.1.3 Sensitivity Analysis for RRR
The two variables in the CAPM that are subject to change are beta, which represents systematic risk and the
market risk premium. The market risk premium (MRP) is the difference between the risk free rate of return
and the return of the market portfolio. The market risk premium remains the same for all assets in the
market, thus it is the beta coefficient that determines the riskiness of any given asset.
Figure 17 below demonstrates the relationship between beta and the market premium on the required rate of
return. As we can see this relationship is positive, that is as beta increases, the market risk premium will also
increase. This makes sense, because what CAPM says is that as risk increases (represented by beta) then
investors will require more return to compensate for holding more systematic risk because this cannot be
eliminated by diversification. Interesting to note, if we had not adjusted the raw beta value for Bisalloy
computed at 0.8731 the required rate of return would be much lower at 10.72%, where premium for holding
systematic risk is only 5.74% compared to 8.35% when beta is 1.284.
48
Figure 17: Required Rate of Return (r) Sensitivity to Beta & MRP
REQUIRED RATE OF RETURN REQUIRED RATE OF RETURN REQUIRED RATE OF RETURN REQUIRED RATE OF RETURN
Market Risk Premium Market Risk Premium Market Risk Premium Market Risk Premium Market Risk Premium Market Risk Premium Market Risk Premium Market Risk Premium Market Risk Premium
Beta
0.52 1.52 2.52 3.52 4.52 5.52 6.52 7.52 8.52
0.68 5.33 6.01 6.69 7.37 8.05 8.73 9.41 10.09 10.77
0.88 5.44 6.32 7.20 8.08 8.96 9.84 10.72 11.60 12.48
1.08 5.54 6.62 7.70 8.78 9.86 10.94 12.02 13.10 14.18
1.28 5.65 6.93 8.21 9.49 10.77 12.05 13.33 14.61 15.89
1.48 5.75 7.23 8.71 10.19 11.67 13.15 14.63 16.11 17.59
1.68 5.85 7.53 9.21 10.89 12.57 14.25 15.93 17.61 19.29
1.88 5.96 7.84 9.72 11.60 13.48 15.36 17.24 19.12 21.00
2.08 6.06 8.14 10.22 12.30 14.38 16.46 18.54 20.62 22.70
2.28 6.17 8.45 10.73 13.01 15.29 17.57 19.85 22.13 24.41
DIVIDEND GROWTH RATE DIVIDEND GROWTH RATE DIVIDEND GROWTH RATE CONSTANT GROWTH MODEL
Return on Equity (ROE) Return on Equity (ROE) Return on Equity (ROE) Return on Equity (ROE) Return on Equity (ROE)
Growth
Dividend Payout Ratio Dividend Payout Ratio Dividend Payout Ratio
5.45% 11.57% 14.46% 17.60% 18.22%
DDM Valuation DDM Valuation 0.68
Sector Average Sector Average
6.47% 5.10% 10.82% 13.52% 16.46% 17.04% 0.88
Industry Average Industry Average
14.09% 4.68% 9.94% 12.42% 15.12% 15.65% 1.08
S&P 500 Average S&P 500 Average
36.04% 3.49% 7.40% 9.25% 11.26% 11.65% 1.28
Peer Average Peer Average
65.89% 1.86% 3.95% 4.93% 6.00% 6.21% 1.48
Bisalloy Average Bisalloy Average
81.19% 1.03% 2.18% 2.72% 3.31% 3.43% 1.68
1.88
2.08
2.28
The lower the dividend payout, the higher the dividend growth The lower the dividend payout, the higher the dividend growth The lower the dividend payout, the higher the dividend growth The lower the dividend payout, the higher the dividend growth The lower the dividend payout, the higher the dividend growth The lower the dividend payout, the higher the dividend growth
49
7. Company Valuation
7.1 The Present Value of Dividends Model
Determining the present value of all future dividends is one way to estimate the value of a company and its
stock. The theory is that the value of company stock is equal to all its future cash-flows, where under this
model, dividends represent the expected cash-flows of the company. In this case the discounted dividend
model can be used. Like many models, the DDM makes a number of assumptions to simplify the calculation.
The main assumption we must make is the appropriate growth rate for company dividends.
There are two models which can be used to compute the present value of all future dividends. The first is the
constant growth DDM as shown below, where g (growth rate) must be smaller than the required rate of
return (r). Therefore, this model is only applicable when the rate of growth is considered to be the long-term
stable growth rate.
Constant Growth DDM:
Topic 3: Part 1 & 2
Valuation
SHARES & EQUITY
Ordinary Share Valuation
• The price of a share (market value) is the value of future cash flows, appropriately discounted using the
required rate of return.
• The expected cash flows to be received from the share are the future dividends.
• The price of the share depends on dividends, so the growth rate of dividends is very important.
• THE PRICE OF THE SHARE WILL ALWAYS DEPEND ON ALL EXPECTED FUTURE DIVIDENDS ONLY
AND NOT MATURITY OR SALE PRICE
***Dividend valuation model:
• Market Price of shares= PV of all expected future cash flows (dividends)
• Share Value= Present value of dividends expected
Therefore the price of the share at t=0 depends on the dividends at t=1,2,3 etc. The dividends must be discounted
because of the time value of money.
***Constant Growth:
• Where dividends are expected to grow forever at a constant rate, thus grow by the same percentage each
period.
• Dividend growth model:
• The constant growth in dividend formula assumes that dividends grow at a constant rate from t=0,
and this depends on the dividend at t=1. The required rate of return must be greater than the
growth rate.
• The formula can be used when dividends grow from a constant rate at t=n, and this depends on the
dividend at t=n+1
• Dividend yield= Dividend (1) / Price (0)
If you can’t use DIVY formula above because you don’t have enough information, remember that the required rate of
return = Dividend yield + Capital Gains Yield. Then you can rework formula so Dividend yield= rate of return -
capital gains yield.
BAFI1008 BUSINESS FINANCE
4
However, there are cases where the growth rate will exceed the required rate of return in the short-term, or
may fluctuate for a given period due to economic, industry or company specific developments. This is a
common occurrence in fast-growing or cyclical type companies. Based on our earnings forecasts, we place
Bisalloy in this category. Therefore, we will predict multiple stages of growth for Bisalloy, that will exceed the
required rate of return of 13.35% using the multiple growth stage model as shown below.
Multiple Stage Growth DDM:
7.1.1 Estimating the Dividend Growth Rate
The DDM model is best used for companies that pay regular dividends because there a higher probability
that future dividends will follow a similar trend to historical dividend payouts. Bisalloy, however have not paid
dividends since 2007 and have only paid dividends three times since their listing on the ASX. As a result, this
makes it difficult to forecast not only dividend growth, but what the initial dividend payout will be. The model
that we will use to estimate dividend growth (g) is shown below:
g = Retention Rate (RR) x Return on Equity (ROE)
In section 5.2.2 we estimated earning growth for Bisalloy broken into four phases of growth; downturn,
recovery, growth and stabilisation before reaching a figure for constant growth. Our approach, recommended
by Rielly & Brown (2009, p463) is to estimate ROE under each growth phase, and then multiply this with an
appropriate payout ratio to provide a value for g. The calculation is shown below in table 10 below, where
inputs have been taken from table 7 in section 5.2.2.
After we compute the ROE for each growth phase, we must determine the retention rate (RR) in order to
calculate dividend growth. Looking at Bisalloyʼs historical dividend payout ratios provides little insight, as
each dividend is subject to a different payout ratio as follows; 69.23% in 2005, 136.84% in 2006 and 37.5%
in 2007. The average payout over this period is 81.19%.
Topic 3: Part 1 & 2
Valuation
SHARES & EQUITY
Ordinary Share Valuation
• The price of a share (market value) is the value of future cash flows, appropriately discounted using the
required rate of return.
• The expected cash flows to be received from the share are the future dividends.
• The price of the share depends on dividends, so the growth rate of dividends is very important.
• THE PRICE OF THE SHARE WILL ALWAYS DEPEND ON ALL EXPECTED FUTURE DIVIDENDS ONLY
AND NOT MATURITY OR SALE PRICE
***Dividend valuation model:
• Market Price of shares= PV of all expected future cash flows (dividends)
• Share Value= Present value of dividends expected
Therefore the price of the share at t=0 depends on the dividends at t=1,2,3 etc. The dividends must be discounted
because of the time value of money.
***Constant Growth:
• Where dividends are expected to grow forever at a constant rate, thus grow by the same percentage each
period.
• Dividend growth model:
• The constant growth in dividend formula assumes that dividends grow at a constant rate from t=0,
and this depends on the dividend at t=1. The required rate of return must be greater than the
growth rate.
• The formula can be used when dividends grow from a constant rate at t=n, and this depends on the
dividend at t=n+1
• Dividend yield= Dividend (1) / Price (0)
If you can’t use DIVY formula above because you don’t have enough information, remember that the required rate of
return = Dividend yield + Capital Gains Yield. Then you can rework formula so Dividend yield= rate of return -
capital gains yield.
BAFI1008 BUSINESS FINANCE
4
50
Table 9: Relative Dividend Payout Ratios
Dividend Payout Ratio Dividend Payout Ratio Dividend Payout Ratio
Sector Average Sector Average
6.47%
Industry Average Industry Average
14.09%
S&P 500 Average S&P 500 Average
36.04%
Peer Average Peer Average
65.89%
Bisalloy Average Bisalloy Average
81.19%
Table 9 above shows the average dividend payout ratios for the industrials sector, capital goods industry, the
aggregate stock market and Bisalloyʼs peer group. From this we can see that Bisalloyʼs historical average is
well above these ratios and combined. Also because this is an average of only three years of historical data,
it is not deemed to be a good indication of Bisalloyʼs future dividends. Therefore have been forced to make
the following assumptions regarding Bisalloyʼs dividend payments:

We have assumed that the first dividend will not be paid until June 30 2012 after the recovery phase in
2010, based on NPAT for the FY 2011-12. It is assumed the payout ratio during the growth period will
be quite low at 7% compared to its peer average, as the company reinvests earnings to rebuild and
and continue to reduce its debt.

It is then assumed as of June 30 2015 the company will be in a stable financial position after a period
of high earnings growth, so will increase their payout ratio to 30%, moving closer to the peer average.

It is based on the average of peers BlueScope, OneSteel and Bradken that the long-term payout ratio
will be 65%.
On these assumptions, dividend growth rates are as shown in table 10 below:
Table 10: Estimated Dividend Growth
Growth
Phase
Period
Return on
Assets
Interest
Expense
Rate
Net Before
Tax/Total
Assets
Financial
Leverage
Multiplier
Net Before
Tax/
Common
Equity
Tax
Retention
Rate
Return
on
Equity
Dividend
Payout
Ratio
Dividend
Growth
(g)
Downturn 2009 8.79% 7.25% 1.54% 0.735 1.16% 0.55 0.64%
0% 0.64%
Recovery 2010F 16.28% 7.00% 9.28% 0.912 8.46% 0.60 5.08%
0%
5.08%
Growth 2011-14F 34.46% 7.00% 27.46% 1.022 28.07% 0.65 18.25%
7%
16.97%
Stabilise 2015-17F 34.46% 6.50% 27.96% 1.030 28.81% 0.67 19.45%
30%
13.61%
Constant 2018- 34.46% 6.00% 28.46% 0.757 21.56% 0.70 15.09%
65%
5.28%
2011.00 5.00%
Dividend Payout Ratio Dividend Payout Ratio Dividend Payout Ratio
2012.00 15.00%
Sector Average Sector Average 6.47% 2013 25
Industry Average Industry Average 14.09% 2014 35
S&P 500 Average S&P 500 Average 36.04% 2015 50
Peer Average Peer Average 65.89% 2016 55
Bisalloy Average Bisalloy Average 81.19% 2017.00 60.00%
2018.00 65.00%
DuPont
Inputs
EBIT Net Sales
Total
Assets
Interest
Expense
Net Profit
Before Tax
Common
Equity
Income
Taxes
no disportionate increase in costs to make these sales no disportionate increase in costs to make these sales no disportionate increase in costs to make these sales no disportionate increase in costs to make these sales
2009-10 4,234,000 5,138,000 48,148,000 3,492,000 763,000 65,539,000 346,000 margin is constant margin is constant margin is constant
2010-11F 9,729,611 10,865,004 59,757,522 4,183,027 5,546,585 65,539,000 2,218,634
2011-14F 23,085,899 24,358,638 66,986,255 4,689,037 18,396,861 65,539,000 6,438,901
7.8% growth expected in the industry 7.8% growth expected in the industry 7.8% growth expected in the industry 7.8% growth expected in the industry
2015-18F 23,271,915 24,554,909 67,526,000 4,389,190 18,882,725 65,539,000 6,136,886
inventories for 1 dollar of sales inventories for 1 dollar of sales inventories for 1 dollar of sales inventories for 1 dollar of sales
2018 Onwards 2018 Onwards 17,106,817 18,049,926 49,637,297 2,978,238 14,128,580 65,539,000 4,238,574
assuming today is maintained assuming today is maintained assuming today is maintained assuming today is maintained
ratio of sales to inventory ratio of sales to inventory ratio of sales to inventory
3327951.00 332795
0.00508
The first dividend will be equal to 7% of NPAT for FY 2011-12, based on existing common equity of
$65,539,000. Therefore D0 is equal to $0.013. Using the growth rates above and RRR of 13.35% in the
multiple growth dividend discount model (DDM) as shown table 11 below.
Table 11: Bisalloy DDM Valuation
Growth Scenario Growth Scenario ROE Dividend Payout Ratio Dividend Payout RatioRention Rate Growth Rate
2010-11
No Dividends declared No Dividends declared
0.00%
2011-14
Moderate Steel Production Growth (7.8%)
18.22%
0.1409 (1)
0.8591 15.65%
2014-15
Declining Steel Production Growth (-1%)
17.60%
0.1409 (1)
0.8591 15.12%
2015-16
Declining Steel Production Growth (-1%)
14.46%
0.1409 (1)
0.8591 12.42%
2016-17
Declining Steel Production Growth (-1%)
11.57%
0.1409 (1)
0.8591 9.94%
Dividend Payout Ratio Dividend Payout Ratio Dividend Payout Ratio
2018 onwards
Stable Steel Production Growth (3.9%)
5.45%
0.1409 (1)
0.8591 4.69% Sector Average Sector Average
6.47%
(
1
Based on Industry Average) (
1
Based on Industry Average) (
1
Based on Industry Average) Industry Average Industry Average
14.09%
S&P 500 Average S&P 500 Average
36.04%
Peer Average Peer Average
65.89%
Bisalloy Average Bisalloy Average
81.19%
Payment n g Dividend
Discount
Factor
PV
Growth Phase Growth Phase Growth Phase Growth Phase Growth Phase Growth Phase
Jun-12 0 0.00% 0.013 0.013 11940170
Jun-13 1 16.97% 0.015 0.87 0.0132
Jun-14 2 16.97% 0.018 0.78 0.0138 Where D@ t=0 is Where D@ t=0 is 1682369.9
Stabilisation Phase Stabilisation Phase Stabilisation Phase Stabilisation Phase Stabilisation Phase Stabilisation Phase
Jun-15 3 13.61% 0.020 0.69 0.0139 common equity common equity 0.03
Jun-16 4 13.61% 0.023 0.61 0.0139
65,539,000
Jun-17 5 13.61% 0.026 0.53 0.0139
Jun-18 6 13.61% 0.030 0.47 0.0140 0.09571888
Constant Growth Constant Growth Constant Growth Constant Growth Constant Growth Constant Growth
2018 onwards 6 5.28% 0.3164 0.47 0.149
Value @ June 30 2012 Value @ June 30 2012 0.245
PV @ 30 September 2010 PV @ 30 September 2010 0.2183197
DDM USING INDUSTRIALS SECTOR AVERAGE PAYOUT RATIO DDM USING INDUSTRIALS SECTOR AVERAGE PAYOUT RATIO DDM USING INDUSTRIALS SECTOR AVERAGE PAYOUT RATIO DDM USING INDUSTRIALS SECTOR AVERAGE PAYOUT RATIO DDM USING INDUSTRIALS SECTOR AVERAGE PAYOUT RATIO DDM USING INDUSTRIALS SECTOR AVERAGE PAYOUT RATIO
n g Dividend Discount Factor PV
11940170
High Growth Period High Growth Period
D0 Jun-12 0.00% 0.012 0.012 754618.74
D1 Jun-13 1 17.04% 0.014 0.88 0.01218414
D2 Jun-14 2 17.04% 0.016 0.78 0.01258078
Declining Growth Period Declining Growth Period
D3 Jun-15 3 16.46% 0.019 0.69 0.01292596
51
The present value of future dividends, where t0 is 30 September 2010 has been calculated at $0.22. The
prevailing market share price at this point was $0.18, so our PV is $0.04 above the market determined
Bisalloy share price. Or in other words, our estimated intrinsic share would trade at a 22% premium to the
market price. Therefore, assuming our DDM valuation was correct, the market is currently undervaluing
Bisalloy stock, which provides an arbitrage opportunity to purchase the stock at a discount and sell for a
premium of $0.04 when the equilibrium price adjusts upwards.
7.1.2 DDM Sensitivity Analysis
The DDM calculation is subject to two key variables, that is the growth rate and the required rate of return.
However, because we computed the growth rate using g = RR x ROE, we have also assessed the growth
rate sensitivity to the dividend payout ratio and ROE. It is fundamental to understand this relationship, as
these variables have been estimated and the accuracy of this estimation will affect the final valuation.
As shown by our calculation of dividend present value, we have used three different growth rates to
represent three different phases of growth; growth, stabilisation and constant. Obviously, the impact of this
growth rate in isolation, is that the higher the growth rate, the larger the dividends. Therefore, dividends will
not grow as much in time periods 3-6 as in periods 1 and 2. The effect of the required rate of return is shown
by the discount factor. Holding the RRR constant, the larger the value of n, the larger the discount factor.
This is because the more we forecast in the future, the more we must discount back obtain todayʼs value. If
the RRR was increased, then the discount factor would also increase, because greater the accumulated
return in the future, more return must be discounted back. Therefore, if we underestimate the RRR value,
then the value, we will end up with a higher present value and vice versa. If we overestimate the growth rate
then we will also end up with a higher present value and vice versa.
Sensitivity of DDM Growth Rate
Effectively, the growth rate formula tells us that the growth rate of dividends is equal to the return on retained
earnings. As shown in table 12 below, if all things are held constant ROE is increased, the dividend growth
rate will increase, because the return on retained earnings has increased. However, if we hold ROE constant
and increase the dividend payout ratio, the dividend growth rate will decline. This is because the higher the
payout ratio, the lower the retained earnings on which return can be generated. In the long-run when Bisalloy
pays out 65% of earnings as dividends compared to only 7%, the rate of return on dividends will decline to
by 11.69% even though ROE can only decreased by 3.16%. Therefore, the growth rate of dividends appears
more sensitive to the dividend payout ratio, thus the ability to estimate dividend growth depends primarily on
the valuerʼs ability to predict the payout ratio.
Table 12: Sensitivity of Growth Rate to Payout Ratio & ROE
Required Rate of Return (r) Required Rate of Return (r) Required Rate of Return (r) Required Rate of Return (r) Required Rate of Return (r) Required Rate of Return (r) Required Rate of Return (r) Required Rate of Return (r) Required Rate of Return (r)
Growth (g)
10.35% 11.35% 12.35% 13.35% 14.35% 15.25% 16.35% 17.35%
1.00% 0.12969 0.12643 0.12374 0.12149 0.11958 0.11809 0.11650 0.11524
3.00% 0.13972 0.13448 0.13036 0.12703 0.12429 0.12221 0.12005 0.11837
5.28% 0.16081 0.15012 0.14246 0.06914 0.13220 0.12893 0.12565 0.12319
10.00% 1.07754 0.35044 0.24214 0.19850 0.17493 0.16139 0.15005 0.14269
13.62% -0.01257 -0.06038 -0.18347 -1.21835 0.58206 0.31366 0.22594 0.19109
16.97% 0.04077 0.03095 0.01688 -0.00497 -0.04349 -0.11645 -0.49328 1.05733
20.00% 0.05711 0.05262 0.04696 0.03959 0.02962 0.01705 -0.00673 -0.04548
25.00% 0.06930 0.06735 0.06509 0.06244 0.05929 0.05591 0.05082 0.04492
DIVIDEND GROWTH RATE DIVIDEND GROWTH RATE DIVIDEND GROWTH RATE
Return on Equity (ROE) Return on Equity (ROE) Return on Equity (ROE) Return on Equity (ROE) Return on Equity (ROE)
Dividend Payout
Ratio
0.64% 5.08% 18.25% 19.45% 15.09%
5%
0.61% 4.83% 17.34% 18.48% 14.34%
7% 0.60% 4.72% 16.97% 18.09% 14.03%
15% 0.54% 4.32% 15.51% 16.53% 12.83%
25% 0.48% 3.81% 13.69% 14.59% 11.32%
30% 0.45% 3.56% 12.78% 13.62% 10.56%
45% 0.35% 2.79% 10.04% 10.70% 8.30%
55% 0.29% 2.29% 8.21% 8.75% 6.79%
60% 0.26% 2.03% 7.30% 7.78% 6.04%
65% 0.22% 1.78% 6.39% 6.81% 5.28%
70% 0.19% 1.52% 5.48% 5.84% 4.53%
80% 0.13% 1.02% 3.65% 3.89% 3.02%
52
7.2 Present Value of Free Cash Flow to Equity
The free cash flow to equity (FCFE) model determines the free cash flow available to shareholders after
payments to all other capital suppliers and after providing for the continued growth of the company. This is
unlike the present value of dividends model (DDM) where the cash flows being valued are future dividend
payments. However, this model follows the same present value of earnings concept and measures cash flow
allowing for capital expenditure and changes in working capital. These cash flow also precede dividend
payments to the common stockholder. Ultimately the FCFE is a measure of what a firm can afford to pay out
as dividends.
In general FCFE model determines the present value of free cash flows using the equation as follows:
Where:
! Vj = value of stock j
! n = life of the asset
! FCFEt = cash flow in period t
! k = the discount rate that is equal to the investorʼs required rate of return for asset j
(Taken from RMIT University 2010, Lecture notes for BAFI 1042 ʻInvestmentsʼ)
The value for FCFE is calculated by making following adjustments :
! ! ! FCFE = ! Net Earnings
! ! ! less (Capital Exp – Depreciation) *(1 – Debt Ratio)
! ! ! less (Change in Working Capital) *(1 – Debt Ratio)
Assumptions for FCFE calculations:

Net Earnings are represented by Net Profit After Tax (NPAT).

Capital Expenditure and Depreciation figures are taken from Bisalloyʼs annual reports as is.

Debt Ratio is calculated as Debt/ Debt + Equity.

Working Capital is calculated as Current Assets less Current Liabilities.
Table 13: Bisalloy Historical Free Cash Flow to Equity (2009)
Year ended 30th June 2009, A$ in '000
NPAT (3,892)
Capital Expenditure 2,340
Depreciation 1,179
(Cap Ex – Depreciation) 1,161
Debt Ratio 87%
(Cap Ex – Depreciation)*(1- Debt Ratio) (1) 151
Change in Working Capital 14,793
Debt Ratio 87%
(Change in Working Capital)*(1 – Debt Ratio) (2) 1,923
NPAT less (1) less (2) (5,966)
Weighted average number of shares on issue (ʻ000) 188,223
FCFE per share in 2009 (cents per share) (3.17)
53
7.2.1 Estimating the FCFE Growth Rate
Historically, Bisalloyʼs FCFE per share has been extremely volatile ranging between 8.74c and -74.99c in the
last five years. This volatility was largely due to high variability of earnings, constant significant changes in
working capital and substantial changes in debt ratio from year to year. While Bisalloyʼs capital expenditure
(traditional source of FCFE volatility) was more stable and predictable, all other major variables brought a lot
of uncertainty. Therefore, despite the fact Bisalloy operates mostly in the well-established markets it possess
basic characteristics of emerging market company or company with depressed earnings.
!
Table 14: Bisalloy Historical Free Cash Flow to Equity Values
Year ended 30th June, A$ in '000 2010F 2009 2008 2007 2006 2005
NPAT
417 (3,892) (63,255) (1,062) (4,002) 13,177
Capital Expenditure
950 2,340 3,198 6,987 6,362 8,006
Depreciation
904 1,179 5,460 4,846 5,652 4,802
Debt Ratio
60% 87% 109% 80% 59% 61%
Changes in Working Capital
22,927 14,793 (166,232) 39,153 (32,082) 15,246
FCFE
(8,772) (5,966) (78,419) (9,321) 8,861 5,982
Average number of shares on issue ('000)
216,456 188,223 104,568 103,682 101,368 98,500
FCFE (cents per share)
(4.05) (3.17) (74.99) (8.99) 8.74 6.07
Table 14 above demonstrates that Bisalloy experienced cash flow deficit in the last four years and had to
fund its capital expenditure by making additional debt arrangements. However, it is worthwhile to mention
that unlike bottom line profit figures shown above, the NPAT from the continuing manufacturing operations
(segmented from the distribution business) has been positive, and demonstrates a trend of positive growth.
However, as the figures above are of the consolidated company, the positive profits of the manufacturing
business have been offset by losses from unprofitable distribution segment.
The discontinued distribution operations had a major negative impact on Bisalloyʼs (consolidated) financial
performance in FYs 2007-08, 2008-09 which is thought to have spilled over into 2009-10, however in
2010-11 no sediment is expected from the distribution operations. Based on our earnings forecast in section
5.1, we expect constantly growing NPAT, decreasing debt ratio and stabilisation of working capital changes
will return Bisalloy to profitability in FY 2009-10 and bring FCFE per share back to a positive figure in FY
2010-11.
On the basis of this positive earnings outlook, we have made the following growth assumptions for FCFE:
Table 15: Estimated FCFE Growth (as at FY ended 30
th
of June)
Recovery phase
Growth phases Growth phases Growth phases Growth phases
Recovery phase
Phase 1 Phase 3 Phase 3 Phase 4
2010 2011 2012-2014 2015-2017 2018 onwards
Negative growth rate
of (45%)
Negative effects of
GFC, economic
downturn and
business restructure,
start of recovery
Growth rate of 120%
Full recovery from
discontinued
operations, global
economic recovery,
increasing demand
for steel industry
products, return to
positive FCFE
Growth rate of 45%
Strong demand,
leverage to the mining
sector, new resource
projects, exploiting new
opportunities and
competitive advantage
via access to growing
China market (new joint
venture) and strong
armour plate growth
domestically and
internationally
Growth rate of 17%
Declining demand for steel
plates, however growth is
stable due to realised
benefits from replicated
Q&T production process,
closed product portfolio gap
and access to new markets
Growth rate of 3%
Maturity of business,
stable annuity style
income stream,
reduction in capital
requirements
54
Our assumptions state that FCFE is starting to grow, and should return to positive value in FY 2010-11. Both
half year and full year preliminary results for FY 2009-10 demonstrate that no positive growth can be
expected during this period. Very high growth rate for 2010-11 (phase 1) is explained largely by global
economic recovery and full recovery from business restructure as well as by technical component of this
value (i.e. large % difference between negative and positive values). Relatively high growth rate for phase 2
may be influenced both positively and negatively by the strength of steel industry demand, pace of new joint
venture development, rate of growth for armour plate sales (mostly international) and improvement of
Bisalloyʼs product range. Replication of production process, production optimisation and access to new
markets (China, Europe, South America, Western Australia) should help Bisalloy to maintain stable growth
rate in phase 3 when steel industry may be affected by the declining demand.
Having made these FCFE growth rate assumptions we can use them as an input into FCFE model to value
to Bisalloyʼ stock as show in table 16 below.
Table 16: Base case FCFE valuation
Actual Recovery
Growth Phases Growth Phases Growth Phases Growth Phases Growth Phases Growth Phases Growth Phases Growth Phases
Actual Recovery
Phase 1 Phase 2 Phase 2 Phase 2 Phase 3 Phase 3 Phase 3 Phase 4
Year end 30

June 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018-
FCFE growth rate -45% 120% 45% 45% 45% 17% 17% 17% 3%
FCFE (cents per
share)
-3.17 -4.60 0.92 1.33 1.93 2.80 3.28 3.84 4.49 4.63
Annuity* 44.70
Time Period 0 1 2 3 4 5 6 7 8 9
Discounted FCFE
(cents per share)
-3.17 -4.06 0.72 0.92 1.17 1.50 1.55 1.60 1.65 1.50
Discounted Annuity 14.47
*Value of annuity @ FY2018 = 4.63 / (13.35% - 3%) = 44.7c NPV per share *Value of annuity @ FY2018 = 4.63 / (13.35% - 3%) = 44.7c NPV per share *Value of annuity @ FY2018 = 4.63 / (13.35% - 3%) = 44.7c NPV per share *Value of annuity @ FY2018 = 4.63 / (13.35% - 3%) = 44.7c NPV per share *Value of annuity @ FY2018 = 4.63 / (13.35% - 3%) = 44.7c NPV per share *Value of annuity @ FY2018 = 4.63 / (13.35% - 3%) = 44.7c NPV per share *Value of annuity @ FY2018 = 4.63 / (13.35% - 3%) = 44.7c NPV per share *Value of annuity @ FY2018 = 4.63 / (13.35% - 3%) = 44.7c NPV per share *Value of annuity @ FY2018 = 4.63 / (13.35% - 3%) = 44.7c NPV per share *Value of annuity @ FY2018 = 4.63 / (13.35% - 3%) = 44.7c NPV per share $0.21
A valuation of $0.21 represents a 16.7% premium to Bisalloyʼs market price of $0.18 as at 30 September
2010.
7.2.1 Sensitivity Analysis
FCFE model valuation will be sensitive to the two major factors; cost of equity (represented by required rate
of return (RRR) for investors) and growth rates for FCFE. We have undertaken sensitivity analysis to reflect
different potential scenarios related to changes in these two variables. Under the CAPM the key variables of
Bisalloyʼs RRR will be the estimates of Bisalloyʼs beta and market risk premium. The impact of altering these
variables is as follows (current Bisalloy beta is 1.28 and current market return is 6.52%).
Table 17: FCFE Discount Rate Sensitivity (Assume FCFE growth rates as per base case valuation above)
Beta
Market Risk Premium Market Risk Premium Market Risk Premium Market Risk Premium Market Risk Premium Market Risk Premium Market Risk Premium Market Risk Premium Market Risk Premium
Beta
0.52% 1.52% 2.52% 3.52% 4.52% 5.52% 6.52% 7.52% 8.52%
0.48
1.44 1.15 0.96 0.82 0.71 0.62 0.55 0.49 0.44
0.68
1.37 1.03 0.81 0.66 0.56 0.47 0.41 0.36 0.32
0.88
1.30 0.92 0.70 0.55 0.45 0.38 0.32 0.28 0.24
1.08
1.24 0.83 0.61 0.47 0.38 0.31 0.26 0.22 0.19
1.28
1.18 0.75 0.53 0.40 0.32 0.26 0.21 0.18 0.15
1.48
1.14 0.69 0.48 0.35 0.27 0.22 0.18 0.14 0.12
1.68
1.09 0.63 0.43 0.31 0.24 0.18 0.15 0.12 0.10
1.88 1.05 0.59 0.39 0.28 0.21 0.16 0.13 0.10 0.08
2.08 1.01 0.54 0.35 0.25 0.18 0.14 0.11 0.08 0.07
55
Table 17 above demonstrates that Bisalloy stock value has an inverse relationship to both beta value and
market risk premium, i.e. other things being equal, the higher the beta (or market risk premium) the lower the
share value.
Table 18: FCFE Growth Rate sensitivity (Phases 2 and 3 as per Table 15 & 16, RRR=13.35%)
Growth
Phase 3
Growth Phase 2 Growth Phase 2 Growth Phase 2 Growth Phase 2 Growth Phase 2 Growth Phase 2 Growth Phase 2
Growth
Phase 3
25% 30% 35% 40% 45% 50% 55%
5% 0.09 0.11 0.12 0.14 0.16 0.18 0.20
8% 0.10 0.11 0.13 0.15 0.17 0.19 0.21
11% 0.11 0.12 0.14 0.16 0.18 0.20 0.23
14% 0.12 0.13 0.15 0.17 0.20 0.22 0.24
17% 0.13 0.14 0.16 0.19 0.21 0.24 0.26
20% 0.14 0.16 0.18 0.20 0.23 0.25 0.28
23% 0.15 0.17 0.19 0.21 0.24 0.27 0.30
26% 0.16 0.18 0.20 0.23 0.26 0.29 0.32
29% 0.17 0.19 0.22 0.25 0.28 0.31 0.34
From table 18 we can see that the Bisalloy stock is less sensitive to FCFE growth rates than to the required
rate of return. Two extreme scenarios presented in the table above put stock value in the range between
$0.09 (worst case scenario) and 0.34 (best case scenario). This spread is narrow comparing to the potential
stock value spread from RRR changes. Therefore we may conclude that FCFE growth rates are being a
secondary variable (comparing to the cost of capital) in determination of Bisalloy stock value.
7.3 Price/Earnings Ratio Model (P/E)
Price/earnings ratio model (also referred to as earnings multiplier model) attempts to determine how many
dollars investors are willing to pay for a dollar of (stock) expected earnings and does that by relating the
current market price of the company to its earnings per share. The earnings multiplier can be computed as
follows:
P/E Ratio = Current Market Price of Shares / Expected 12-months Earnings per share
The infinite period dividend discount model can be used to indicate the variables which should determine the
value of P/E ratio using the following formula:
If we now divide both sides of the equation by earnings per share (EPS₀) the formula will present like this:
Therefore earnings multiplier can be ultimately simplified as:
This formula demonstrates that price/earnings ratio is determined by:

Expected dividend payout ratio,
Topic 3: Part 1 & 2
Valuation
SHARES & EQUITY
Ordinary Share Valuation
• The price of a share (market value) is the value of future cash flows, appropriately discounted using the
required rate of return.
• The expected cash flows to be received from the share are the future dividends.
• The price of the share depends on dividends, so the growth rate of dividends is very important.
• THE PRICE OF THE SHARE WILL ALWAYS DEPEND ON ALL EXPECTED FUTURE DIVIDENDS ONLY
AND NOT MATURITY OR SALE PRICE
***Dividend valuation model:
• Market Price of shares= PV of all expected future cash flows (dividends)
• Share Value= Present value of dividends expected
Therefore the price of the share at t=0 depends on the dividends at t=1,2,3 etc. The dividends must be discounted
because of the time value of money.
***Constant Growth:
• Where dividends are expected to grow forever at a constant rate, thus grow by the same percentage each
period.
• Dividend growth model:
• The constant growth in dividend formula assumes that dividends grow at a constant rate from t=0,
and this depends on the dividend at t=1. The required rate of return must be greater than the
growth rate.
• The formula can be used when dividends grow from a constant rate at t=n, and this depends on the
dividend at t=n+1
• Dividend yield= Dividend (1) / Price (0)
If you can’t use DIVY formula above because you don’t have enough information, remember that the required rate of
return = Dividend yield + Capital Gains Yield. Then you can rework formula so Dividend yield= rate of return -
capital gains yield.
BAFI1008 BUSINESS FINANCE
4
56

Estimated required rate of return on the stock (k),

Expected growth rate of dividends for the stock (g).
In order to estimate the value (price) of the stock we need to complete so called ʻtwo-step processʼ where we
would first calculate P/E ratio and then estimate future earnings (E₁) and multiply them by P/E ratio to derive
stock value (price):
Formula to Derive Stock Price:
V = P/E Ratio x EPS₁
While infinite period DDM formula represents the easiest way to calculate P/E ratio, we can not use its basic
form in this particular case. This formula is applied mostly to mature companies with constant/stable growth
rates. Bisalloy can not be considered as mature business, demonstrated by multiple phase growth which
exceeds the RRR. Company has not paid any dividends since FY 2006-07, and its basic EPS has been
negative since FY 2005-06 ending, and its EPS in FY 2009-10 (both basic and adjusted) are equal to $0.
7.3 Estimating P/E & EPS
Table 19 below provides historical information about Bisalloy earnings per share and dividends paid for last
seven years. Apart from the lack of input data for simple computation of P/E ratio this table also
demonstrates that Bisalloy dividends payout ratio has been extremely volatile and largely unpredictable in
the years when dividends were paid to stockholders.
Table 19: Historical Bisalloy Earnings per share and dividends paid (2005-2010)
FY ended 30
th
of June 2010 2009 2008 2007 2006 2005 2004
Basic EPS (cents)
0.0 -3.0 -61.3 -1.4 -4.4 13.9 12.2
Basic EPS adjusted* (cents)
(1) 0.0 15.2 14.7 8.0 5.7 13.0 9.4
Dividends paid (cents per share)
(2) 0.0 0.0 0.0 3.0 7.8 9.0 7.8
Dividends growth rate (%)
n/a n/a (100%) (61.5) (13.33) 15.38 -
Payout ratio (2 / 1) n/a n/a n/a 37.5% 136.8% 69.2% 83%
*from continuing operations
Using the DDM model, we have estimated future dividend growth rates which actually indicate that Bisalloy
is going to have relatively high growth rates in the next several years. This is why we decided to apply
Fundamental Model to estimate P/E ratio for high growth firm, and use available industry/market ratios and
growth rates calculated earlier for DDM as major input for this model.
We developed a special case to use extended two-stage dividend discount model which relates P/E ratio to
fundamentals. This model is used to estimate P/E ratio for the firms which have a phase(s) of high growth
rates exceeding required rate of return. Similar to the traditional model the P/E ratio here is a function of
growth, risk (required rate of return) and payout ratio, but unlike in the traditional model this equation
combines high growth phase factor and stable growth rate factor. If we divide both sides by the earnings per
share (like in the traditional model) the equation can be rearranged as follows:
57
As Bisalloy has not paid dividends for last three financial years it is difficult to accurately estimate dividend
payout ratios and expected growth rates from Bisalloy historical financial data. Here we have used the same
forecast applied in the DDM calculation, we we projected four phases of growth, with different payout ratios
in each phase. This is summarised in table 20 below.
Table 20: Dividend Growth Assumptions (Used in DDM)
Growth
Phase
Period Return on Assets
Interest
Expense Rate
Net Before Tax/
Total Assets
Financial
Leverage
Multiplier
Net Before
Tax/
Common
Equity
Tax
Retention
Rate
Return
on
Equity
Dividend
Payout
Ratio
Dividend
Growth
(g)
Downturn 2009 8.79% 7.25% 1.54% 0.735 1.16% 0.55 0.64%
0% 0.64%
Recovery 2010F 16.28% 7.00% 9.28% 0.912 8.46% 0.60 5.08%
0%
5.08%
Growth 2011-14F 34.46% 7.00% 27.46% 1.022 28.07% 0.65 18.25%
7%
16.97%
Stabilise 2015-17F 34.46% 6.50% 27.96% 1.030 28.81% 0.67 19.45%
30%
13.61%
Constant 2018- 34.46% 6.00% 28.46% 0.757 21.56% 0.70 15.09%
65%
5.28%
2011.00 5.00%
Dividend Payout Ratio Dividend Payout Ratio Dividend Payout Ratio
2012.00 15.00%
Sector Average Sector Average 6.47% 2013 25
Industry Average Industry Average 14.09% 2014 35
S&P 500 Average S&P 500 Average 36.04% 2015 50
Peer Average Peer Average 65.89% 2016 55
Bisalloy Average Bisalloy Average 81.19% 2017.00 60.00%
2018.00 65.00%
DuPont
Inputs
EBIT Net Sales Total Assets
Interest
Expense
Net Profit Before
Tax
Common Equity
Income
Taxes
no disportionate increase in costs to make these sales no disportionate increase in costs to make these sales no disportionate increase in costs to make these sales no disportionate increase in costs to make these sales no disportionate increase in costs to make these sales
2009-10 4,234,000 5,138,000 48,148,000 3,492,000 763,000 65,539,000 346,000 margin is constant margin is constant margin is constant
2010-11F 9,729,611 10,865,004 59,757,522 4,183,027 5,546,585 65,539,000 2,218,634
2011-14F 23,085,899 24,358,638 66,986,255 4,689,037 18,396,861 65,539,000 6,438,901
7.8% growth expected in the industry 7.8% growth expected in the industry 7.8% growth expected in the industry 7.8% growth expected in the industry
2015-18F 23,271,915 24,554,909 67,526,000 4,389,190 18,882,725 65,539,000 6,136,886
inventories for 1 dollar of sales inventories for 1 dollar of sales inventories for 1 dollar of sales inventories for 1 dollar of sales
2018 Onwards 2018 Onwards 17,106,817 18,049,926 49,637,297 2,978,238 14,128,580 65,539,000 4,238,574
assuming today is maintained assuming today is maintained assuming today is maintained assuming today is maintained
ratio of sales to inventory ratio of sales to inventory ratio of sales to inventory
3327951.00 332795
Growth Phase Period
No. of Periods
in Phase
Dividend
Payout Ratio
Dividend
Growth
(g)
0.00508 Downturn 2009-10 1 0% 0.64%
Recovery 2010-11F 1 0% 5.08%
Growth 2011-14F 4 7% 16.97%
Stabilise 2015-17F 3 30% 13.61%
Constant 2018- Infinite 65% 5.28%
Calculation of Bisalloyʼs P/E Ratio:
The P/E ratio can be interpreted as investors would be willing to pay $10.89 for 1 dollar of expected
earnings. This multiplier can now be used to calculate Bisalloy share price as per formula 1 above (V = P/E
Ratio x EPS₁). However as EPS₀ (for the FY 2009-10) was $0.0 (see table 21 below), so we canʼt estimate
EPS₁ based simply from latest earnings per share. Therefore, we have to make an assumption for EPS₁
based on past Bisalloy earnings and future market/economic outlook.
Table 21: Bisalloy historical EPS (adjusted) data*
FY ended 30
th
of
June
2010 2009 2008 2007 2006 2005 2004 2003
Basic EPS adjusted
(cents)
0.0 15.2 14.7 8.0 5.7 13.0 9.4 12.8
*Where average EPS = 9.9 cents and min EPS = 5.7 cents
As we can see in the last 8 years prior to FY 2009-10 Bisalloy EPS has never dropped lower than 5.7 cents,
with an average of 9.9 cents. However, the company today is very different from the past under Atlas
Holdings, therefore Historical EPS provides little guidance. On this fact, we must forecast EPS based on our
earnings forecasts for the company, which are based on historical data from the continued manufacturing
operations only.
Referring back to our earning forecast in section 5, we make note to a number of factors that will affect future
EPS. Some, of these factors include a positive economic outlook for the coming year, with GDP in Australia
expected to increase by 3.75%, while Chinaʼs growth will slow, but remains high at 9.1% in relative terms. It
is also anticipated that new resource projects in 2011-2012 will increase demand for Bisalloyʼs steel plate
significantly, for use in construction of facilities and from major customer, Caterpillar who manufacturers
equipment for mining and construction sectors.
58
On the basis of such factors, we propose NPAT for 2010-11 will be around $3,327,950 and the number of
shares on issue will be approximately 227,279,000 which is a 5% increase on current shares outstanding.
The resulting EPS value is $0.0146, or 1.5c per share.
We can now use this estimated EPS to compute Bisalloy share price:
A valuation of $0.1634 represents 9.22% discount to Bisalloyʼs current market price of $0.18 as at 30
September 2010.
The spread between required rate of return, denoted here as r and growth (g) is the main determinant of the
size of the P/E multiplier. The dividend payout rate is consider to be more stable and tends to have less
effect. Normally, the basic approach used in P/E model and computation of stock value allows undertaking
sensitivity analysis, where impact of changes in required rate of return and/or expected growth rate of
earnings is calculated to provide stock value ranges for different values of variables. In this particular case
sensitivity analysis is not available as we have not used earnings growth rates in our analysis directly. In
general P/E ratio has a direct relationship with growth rate and an inverse relationship with cost of equity.
The estimated P/E ratio can also be used for relative valuation, i.e. to compare Bisalloy stock to other
industry stocks. Normally, other things being equal, higher growth firms will have higher P/E ratios than lower
growth firms, and higher risk firms will have lower P/E ratios than lower risk firms.
Table 22: Bisalloy peers P/E ratios comparison
Company Bisalloy BlueScope Steel* OneSteel* Bradken*
P/E Ratios 10.89 32.9 16.3 14.2
*Price/Earnings ratio (forward, 12 months) data, InvestSmart 2010
Bisalloyʼs earning multiplier is more than 6 times lower than P/E ratio of BlueScope and more than 3 times
lower than P/E ratio of OneSteel. Having this comparison we can see that Bisalloy is perceived as higher risk
firm rather than higher growth firm. Bisalloyʼs relatively low P/E ratio also indicates that the company stock
may be undervalued by the market. This proposition though requires further detailed investigation.
7.4 Price/Book Value Ratio
This ratio can be used to estimate the intrinsic value of a firm. It works on the assumption that individual
firms within the same industry have consistent accounting practices therefore they can be compared. The
price / book value ratio can be used to determine whether a company is under or over valued. A study by
Fama and French (1992) indicated a significant inverse relationship between P/BV and excess rates of
return for a cross section of stocks, this was theory was reinforced by Rosenberg, Reid, and Lanstein (1985),
and Fairfield (1994)(Reily and Brown,2009). The share with the lowest P/BV represents the best value.

7.4.1 Historical Peer Comparison
The comparison of historical peer price to book value provides a basis for comparison of our estimated P/BV
ratio for future periods. As shown by tables 23 to 25 below, we can see that Bisalloy has a significantly larger
P/BV ratio compared to the average of its peers which was 2.9201, 0.8210 and 1.1862 at 30 June in 2008,
2009 and 2010 respectively. If we were to look at these historical ratios in isolation, the results suggest
59
Bisalloy to be a poor investment because a lower P/BV ratio is considered to be more valuable for investors.
However, based on the positive outlook for the company, we project that this will improve in line with
earnings over the medium term (see section 5 for earnings forecast).
Table 23: Bisalloyʼs Historical Price/Book Ratio
As at 30 June 2008 2009 2010
Share price 0.54 0.15 0.17
Book Value -12,069,000 6,311,000 11,879,000
Weighted average number of
shares
105,822,000 143,567,000 212,927,000
Book value per share -0.1141 0.04396 0.05579
P/BV -4.7326 3.4122 3.0471
Table 24: BlueScopeʼs Historical Price/Book Ratio
As of 30 June 2008 2009 2010
Share price 8.92 2.52 2.10
Book Value 3,941,800,000 5,663,300,000 5,755,700,000
Weighted average number of
shares
905,315,410 931,141,542 1,823,309,479
Book value per share 4.3541 6.0821 3.1567
P/BV 2.0486 0.4143 0.6653
Table 25: OneSteelʼs Historical Price/Book Ratio
As at 30 June 2008 2009 2010
Share price 6.87 2.55 2.98
Book Value 3,429,400,000 4,336,300,000 4,492,700,000
Weighted average number of
shares
835,387,362 1,019,015,274 1,324,634,147
Book value per share 4.1052 4.2554 3.3917
P/BV 2.0486 0.5992 0.8786
7.4.2 Calculating the P/BV Ratio
To estimate the end-of-year book value we estimated net earnings and subtracted the expected dividends.
The common formula used in deriving the Price / Book value is:
Formula Used to Derive Price to Book Ratio:
Price/ Book Value =Pt / BVt+1
The formula can then be extended to:
P/ BV=Pt/ BVt+1 = ROE*Payout Ratio * (1+g) / k-g
Where:
P/BV = The price / book value ratio for the firm
Pt = the price of stock in period t
BV t+1 = The end of year book value per share for the firm.
ROE= Return on equity
Payout ratio = dividends paid per share
g = growth rate
k = required rate of return
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This formula is used primarily for mature companies with constant growth rates, therefore is not the best
model for Bisalloy who we predict will experience strong growth in the short to medium return. The P/BV ratio
can also be calculated using the P/E ratio multiplied by ROE for high growth firms, as shown below.
P/BV = 2.43
Therefore the book value per share for Bisalloy as per 30 September 2010 is $0.41, which is at a significant
premium to the prevailing market price of $0.18. If we compare a P/BV ratio of 2.43 estimated for FY 2010-11
to Bisalloyʼs ratios for FY 2009-10, we can see that this ratio is 0.617, or 20% lower as shown in table 23
above, however over the same period ROE has increased from 0.64% to 5.08% (forecasted). Looking at in
more detail at the historical ROE and P/BV relationship for Bisalloy we note the following:

FY ending June 2008: ROE was 37.43%, close to the peer average but P/BV was significantly lower at
-4.73 compared to average of 2.9201. This shows high ROE relative to low P/BV.

FY ending June 2009: ROE was 36.61%, higher than the peer average at 17.15%, and P/BV was also
higher than peer average at 3.4122. This shows high ROE relative to high P/BV.

FY ending June 2010: ROE was 0.64%, which was very low compared to peer average at 9.04%,
however P/BV was significantly higher than average at 3.0471 compared to 1.1862. This shows low
ROE relative to high P/BV.

Forecast at FY ending June 2011: ROE is estimated to be 5.08%, and P/BV is expected to decline to
2.43 as calculated above. This shows high ROE relative to low P/BV.
Looking at the forecasted P/BV, this ratio is also lower than the peer averages for the last 3 financial years.
Furthermore, when the P/BV ratio is lower, the book value per share is higher. If we are correct, this means
that Bisalloy has high ROE relative to low P/BV based on historical comparisons, thus would be considered
by investors to be undervalued at this point in time. The P/BV ratio is also said to be lower for growth stocks,
because the market values the companyʼs growth potential.
7.4 Net Tangible Assets Backing Model
The Net Tangible Assets Backing Model (NTAB) also know as book value per share, shows the actual net
amount of tangible assets represented by each ordinary share of the company. It is used to show what an
investor would receive per share if the company were to be liquidated. The NTAB is a function of the
companyʼs total assets and liabilities; it therefore represents the companyʼs current value and does not take
into account future growth.
The Common Formula for NTAB Model
NTAB = (Net Assets – Intangible assets – preference shares) /
Weighted average number of ordinary shares
Table 27: Historical NTAB (FY Ending 30 June)*
61
Net assets Intangible assets
Weighted average
number of shares
NTAB
2010 2010 2010 2010 2010
Bisalloy 11,879,000 0 212,927,000 0.0558
Blue Scope 5,755,700,000 1,041,100,000 1,823,309,479 2.5857
One Steel 4,492,700,000 2,070,000,000 1,324,634,147 1.8290
Bradken 471,708,000 173,351,000 130,191,911 2.2917
Broadway - - - -
2009 2009 2009 2009 2009
Bisalloy 6,311,000 0 143,567,000 0.0440
Blue Scope 5,663,300,000 1,089,400,000 931,141,542 4.9121
One Steel 4,336,300,000 2,074,600,000 1,019,015,274 2.2195
Bradken 349,655,000 183,144,000 123,307,825 1.3504
Broadway 20,363,000 7,810,000 30,369,597 0.4133
2008 2008 2008 2008 2008
Bisalloy -12,069,000 0 105,822,000 -0.1141
Blue Scope 3,941,800,000 998,600,000 905,315,410 3.2510
One Steel 3,429,400,000 2,031,300,000 835,387,362 1.6736
Bradken 187,588,000 60,342,000 106,939,252 1.1899
Broadway 15,946,000 7,468,000 19,553,843 0.4336
*All figures sourced from company annual reports
Based on the results shown in table 27 above, in 2010 Bisalloy common share holders would only receive
5.58 cents per share. This is significantly less then its peers who have NTAB of $1.82 to $2.58. Over the 3
year analysis period Bisalloy consistently had the lowest NTAB in every year. Bisalloy had a negative figure
in 2008 due to a negative net asset balance.
We can value the company using the share price as at 30 June 2010 by dividing the share price by NTAB.
The results are shown in table 28 below.
Table 28: Figure Price per Unit of NTAB (As at 30 June 2010)*
Company Share price at
30 June 2010 ($)
NTAB Price paid per unit of
NTAB
Bisalloy 0.17 0.0558 3.1362 x
Blue Scope 2.10 2.58 0.8450 x
One Steel 2.98 1.82 1.6044 x
Bradken 7.20 8.31 0.8664 x
*Share prices taken from www.bloomberg.com
If Bisalloy and its peers were liquidated Bisalloy (assuming that all assets were sold for their current value
and the proceeds after paying liabilities were passed onto share holders) share holders would receive a
capital loss of $0.12 per share. This result is good relative to its peer One Steel would receive a capital loss
of $,0.40, but far worse then peers Blue Scope and Bradken who would receive a capital gain of $0.40 and
$1.11 respectively. Therefore at the current share price Blue Scope and Bradken and are more desirable
investments based on NTBA.
62
Bisalloy share price is 3.1362 times its NTAB. Therefore based on this information all of Bisalloyʼs peers
would be a better investment then Bisalloy, as Bisalloy share holders are paying a greater price for each unit
of NTAB.
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8. Discussion
8.1 Dividend Discount Model (DDM)
The DDM is based on the theory that the fair value of the firm at the present time is equal to all future
expected dividends. Our results for the DDM calculation value the Bisalloy stock at $0.22, which is a 22%
premium to the market price at 30 September 2010 of $0.18. This means one of two scenarios, firstly where
the Bisalloy stock is overvalued by the DDM, or conversely, that the Bisalloy stock is undervalued by the
market.
The first scenario is that our DDM calculation has overstated the price. The reason for the lack of confidence
in the DDM valuation is due to the number of assumptions which had to be made in order to compute the
stock value under the DDM. Although, we undertook extensive research to support our assumptions it
appears that any of our estimates including the dividend payout ratio, ROE, dividend growth rate and
required rate of return could be misjudged.
The most difficult variable to determine was the dividend payout ratio. Bisalloy do not have any regular
dividend practice, and the few dividends that have been paid have inconsistent payout ratios where the
reason behind apparently random payout ratios could not be determined. Therefore, we feel that the DDM
valuation model to be better suited to companies who pay regular dividends, as there is greater probability
that estimate of the payout ratio would be reasonably accurate. It is also possible that our forward earnings
forecasts are far too optimistic, reflecting scenarios where ROE is overstated. On this basis, we would not
rely on the DDM value in isolation when determining whether to buy or sell Bisalloyʼs stock.
However there is a possibility that the market has undervalued the Bisalloy stock, as investors may be yet to
realise the positive long-term outlook for Bisalloy. Here we must remember that Bisalloy is a small firm in
terms of market capitalisation, thus is not followed as closely by share analylists. Therefore, it is more likely
for the market to undervalue stocks of this nature. Furthermore, the market may be uncertain of the
companyʼs future after the divestment of the Atlas Distribution business, which was demonstrated at the time
of sale by the sharp decline of the share price that halved its value over a two month period. If the general
consensus among investors is that Bisalloyʼs stock has been undervalued by the market, then they would
seek to buy the stock at todayʼs price in hope of making a profit when the market rebalances to reflect a
higher price. Only time will tell whether our optimistic DDM valuation is accurate.
8.2 Free Cash Flow to Equity Model
The free cash flow to equity (FCFE) model determines the free cash flow available to shareholders after
payments to all other capital suppliers, and after providing for reinvestment of earnings required for
continued growth of the company.  Ultimately the FCFE is a measure of what the company has leftover to
payout it its shareholders, and for this reason is considered ʻfree cashʼ. Bisalloyʼs FCFE per share has been
extremely volatile in a historical context ranging between 8.74c and -74.99c in the past five years.  We
contribute such volatility largely to high variability of earnings, constant significant changes in working capital
and substantial changes in debt ratio from year to year. While Bisalloyʼs capital expenditure was more stable
and predictable, all other major variables brought more uncertainty.
We predicted future growth of FCFE per share will occur at different rates in the short to medium-term– in
line with the companyʼs forward earnings forecasts. Under this multiple-growth phase FCEE model, the
Bisalloy stock was valued at $0.21; which represents a 16.7% premium to Bisalloyʼs market price of $0.18 as
at 30 September 2010. The FCFE model is sensitive to two major factors; cost of equity and growth.  The
affect of change in the growth rate was shown in table 18, where under two opposite growth extremes the
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stock value ranged from $0.09 to $0.34.  Analysis shows us however, that FCFE is less sensitive to FCFE
growth rates than to changes in the cost of equity (required rate of return). 
We feel that the FCFE model allowed for more reliable assumptions as to the model variables in comparison
to the DDM, P/E and P/BV models. While the deviation of estimated FCFE growth rates still may be an
issue, we feel overall that our assumptions under this model are more reliable. This is because FCFE is
based on earnings cash-flows or NPAT, rather cash flows in the way of dividends. Thus less assumptions
were required to calculate growth of FCFE, because historical NPAT is more transparent compared to
dividend payouts for Bisalloy who does not regularly pay dividends.
Interestingly however, the valuations of the DDM and FCFE models only differed by $0.01. In regard to the
models appropriateness for Bisalloy, we consider FCFE as a good model to predict share price, with its
sensitivity to the estimated cost of equity and growth being the limiting factors. We feel that the difference in
our estimated share value under FCFE model compared to the market price is due to the different
approaches used by valuation analytics to estimate FCFE growth rates and Bisalloyʼs required rate of return,
based on their opinion of the companyʼs future position. As discussed previously, it is likely that the market
has yet to realise the positive outlook for Bisalloy that we present in this report, and are still facing
uncertainty post-sale of the Atlas distribution business.
8.3 Price Earnings Ratio Model
The price earnings ratio (P/E) is a very common method used to analyse company stock, therefore no
valuation report would be complete without mention of this model. More specifically, the P/E provides how
much investors are willing to pay for a dollar of the companies expected earnings. Therefore, it provides
insight to the attitude investors hold regarding a particular company stock.
This model used almost the same variable assumptions as DDM; namely the required rate of return,
dividend growth rate, payout ratio and future earnings. Thus, when calculating the P/E we had the same
issues relating to reliability of such variables as expressed under discussion of the DDM. To reiterate again,
Bisalloy has not paid dividends for last three financial years, so we had to estimated the payout ratio based
on industry and peer averages, rather than Bisalloyʼs historical information. It is important to make a note
here which also applies to earlier discussion, that valuation is all about a forward outlook, so while this take
may have been difficult, lack of historical data forced us to search for more answers pertaining to the future
that might explain what dividends Bisalloy will pay. Therefore, as our assumptions are thoroughly justified by
extensive research we do have confidence that they provide some answers about what the future will bring
for the Bisalloy stock value.
Interestingly, while we had almost the same variables as the DDM, the outcome was quite different with an
estimated share price under P/E model is $0.16, which represents 11.1% discount to the actual share price
$0.18. Therefore, the explanation for the discrepancy is likely to be the EPS calculated. This could be the
volume of shares that Bisalloy will hold in the future. For the purpose of this valuation method we assumed
the number of shares on issue would grow 5% in the next 12 months, which is based largely on historical
trends. Alternatively, the issue could be the value of estimated future earnings (EPS) for the next 12 months.
Forward P/E ratio is considered by analytics to be one of the most important valuation methods (and
probably the most popular as well), so we canʼt afford to assign lowest rating to this model simply on the
basis of possible input deviations. Fortunately, our results demonstrate the P/E to be the most accurate
valuation model used to compute the value of the Bisalloy stock because of the smallest deviation from the
market price of $0.18. However there some points on the P/E method that should be mentioned for balance.
Comparing PE ratios is wrought with danger unless the comparative stock earnings are understood. For
example, say large asset write down by Bisalloy would artificially inflate the underlying P/E of the company.
Thus, this demonstrates the importance of our extensive research prior to valuation. Secondly, it is
65
reasonable to expect that Bisalloy would have a lower P/E than its peers relative to its smaller and less
established business, so one should not be discouraged simply because the P/E is smaller without
understanding the reasons why this is the case.
The P/BV ratio also indicated whether a company is over or under valued. Bisalloy had historic and current
P/BV greater then the average of its peers. A high P/BV suggest that suggest that investors expect the
company to obtain more value for shareholders from its assets. A high P/BV relative to itʼs peers suggest
that Bisalloy may be overvalued.
8.4 Price/Book Value Ratio
Given the relationship between price-book value ratios and returns on equity one can often observe firms
which have high returns on equity selling for above their book value and firms which have low returns on
equity selling at or below book value.
We calculated the book value per share for Bisalloy as per 30 September 2010 to be $0.41, which is at a
significant premium to the prevailing market price of $0.18. This result, consistent with the results of other
models shows the market price to be undervalued. This is also supported by our P/BV relative to ROE
analysis, which demonstrates that Bisalloy is a mismatch. If we compare a P/BV ratio of 2.43 to Bisalloyʼs
historical ratios as computed above, we can see that this ratio is 0.617, or 20% lower than the P/BV for FY
2009-2010 as shown in table 23 above, however over the same period ROE has increased.
When the P/BV ratio is lower, the book value per share is higher. If we are correct, this means that Bisalloy
has high ROE relative to low P/BV based on historical and peer comparisons, thus would be considered by
investors to be undervalued at this point in time. The P/BV ratio is also said to be lower for growth stocks,
because the market values the companyʼs growth potential. Such expectations may exist for Bisalloy, due to
the fact that Bisalloy has completed its business restructure and has good chances to grow earnings in the
coming period of higher demand for steel industry products. There for the results of the P/BV model are
consistent with our growth prospects for the company.
However, we do note that the reliability of P/BV ratio is not considered as a high, as its values are based on
P/E ratio and ROE estimates, which are both based more on technical estimation analysis rather than actual
data. Obviously it is impossible to use actual data because this is a forecasted value for a point of time in the
future. Therefore, we cannot silently accept the suggestion that Bisalloy stock is undervalued.
8.5 Net Tangible Asset Backing
The Net Tangible Assets Backing Model (NTAB) shows the actual net amount of tangible assets represented
by each ordinary share of the company. It is used to show what an investor would receive per share if the
company were to be liquidated. The NTAB is a function of the companyʼs total assets and liabilities; it
therefore represents the companyʼs current value and does not take into account future growth.
It was interesting that Bisalloy had zero intangible assets listed on its balance sheet. With intellectual
property associated with quenched and tempered steel production we were surprised that this was not
included in their balance sheet as an intangible asset. Generally, one of the limitations of NTAB is that it
doesnʼt take intangible assets into consideration, we can represent a large proportion of the companyʼs
value. For example, imagine the goodwill held by Coca Cola, whose brand name is worth a lot to the
company thus is an important asset on the balance sheet. Although, the purpose of NTAB is to provide a
theoretical ʻliquidationʼ value of the company to shareholders, and as intangible assets cannot be liquidated,
they must be excluded. Therefore, if Bisalloy did list any intangible assets then itʼs NTAB would have been
further reduced.
66
Bisalloyʼs NTAB at 30 June 2010 was $0.05, when itʼs share price was $0.17. This shows that if Bisalloy and
its peers were liquidated Bisalloy shareholders would receive a capital loss of $0.12 per share. However, this
result is good relative to its peer One Steel shareholder who would receive a capital loss of $0.40, yet far
worse then peers Blue Scope and Bradken who would receive a capital gain of $0.40 and $1.11 respectively.
Therefore at the current share price Blue Scope and Bradken and are more desirable investments based on
NTBA. Yet we must note that NTAB is calculating purely on historical data, and does not include any forecast
of growth or earnings. Therefore it has limited use in valuing the company to the current share price.
It would be strange practise for an investor to look at NTBA in isolation, because most investors donʼt invest
into a company with an outlook that it may end up in liquidation. Furthermore, despite the positive NTBA for
BlueScope and Bradken, the reality is that because ordinary shareholders hold only residual claims on
company assets, so the likelihood of receiving any payout under a liquidation scenario is very remote. As
most liquidation procedures are lengthy, any residual funds usually end up in the pocket of the liquidator.
8.6 Preferred Valuation Method
On the basis of our discussion, we feel that the Free Cash Flow to Equity (FCFE) model is the most
appropriate valuation approach for Bisalloy given:
1. Ultimately, the true worth of the company is the net cash flows it can generate for shareholders, as
opposed to profit which may be affected by “accounting” adjustments.
2. Bisalloyʼs historical earnings, due to the recent restructure after the sale of the distribution business,
provides little guide about future earnings. However cash flows from the continuing manufacturing
operations give a better indicator of actual cash generation capability.
3. The capital nature of business is such that cash flow rather than earnings is a particular key factor in
generating shareholder value.
9. Conclusion & Recommendation
9.1 To Buy or Sell?
Comparing the derived values from all five valuation models, we get mixed results. The DDM, FCFE and
P/BV models all suggest that the Bisalloy market share price is undervalued. Thus, on the basis of these
three models, investors would seek to buy up Bisalloy stock in order to make a profit when the market price
corrects itself. Conversely, the P/E and NTAB suggest that the Bisalloy stock is overvalued, leading to a
recommendation not to hold the stock.
If we weight the buy or sell decision by the number of underpriced empirical results to overpriced empirical
results, we have 2:3 ratio which suggests there is greater probability that the market stock price is
undervalued so investors should buy. However, a buy or sell decision should not be made on these results in
isolation, instead use them as yet another indicator of future firm performance. Based on our research, we
believe that investors should keep the following points in mind when making the buy or sell decision for the
Bisalloy stock in conjunction with our valuation calculations:

Bisalloy appears well placed to take advantage of investment in steel products that will underpin the
modernisation of Asia, in particular China and India.

The company has established a competitive advantage with the intellectual property surrounding its
steel template products, and as barriers to entry are high in the steel industry, there is reduced risk that
this competitive advantage will be lost.
67

There are a number of risk factors to the optimistic earnings forecast, however this has been factored
in by the required rate of return, or discount rate of 13.35%, based on an adjusted beta of 1.284 which
provides Bisalloy carries greater systematic risk relative to the market.

The company appears to have recently reduced debt capital to a reasonable level and adequate
working capital to allow for growth. Reasonable capital provisions are considered more important in
todayʼs business environment after the lessons of the GFC.
A final point relevant in our conclusion is the fact that the market does not always get it right. This is most
common for small capitalised firms like Bisalloy. Share analysts tend to focus on the outlook of larger firms,
and for this reason there is more information available on these firms to investors in the market. Therefore, it
is very possible that the earnings potential of Bisalloy has yet to be realised by the market, and you would
almost expect that Bisalloyʼs stock be undervalued at this present time. There are a number of reasons why
this undervaluation may have occurred as previously touched on:

It is likely that the market remains uncertain of the companyʼs future after the divestment of the Atlas
Distribution business. The uncertainty of investors was made evident by a sharply declines share price
post-sale.

Bisalloy has yet to establish strong earnings growth, where impact of positive operating revenue
growth on NPAT is offset by the unprofitable returns of the distribution business.
Of course only time will tell whether our company valuation is appropriate or not, but we confidently stand by
our conclusions.
68
10. References
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viewed 25 August 2010, <http://www.abare.gov.au/interactive/09_as_june/htm/steel.htm>
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Atrill, McLaney, Harvey, Jenner 2006, Accounting an Introduction, 3rd Edition, Peason Prentice Hall,
Frenches Forest
Australian Coal Association 2010, Coal & Its Uses, viewed 30 August 2010, <http://
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Bartholomeusz, S 2010, Australian Steel in jeopardy, Business Speculator, published 27 May 2010, viewed
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Black, S, Cusbert, T 2010, Durable Goods and the Business Cycle, Reserve Bank of Australia, Released
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bu-0910-2.pdf>
BlueScope 2010, Global Economic Update, The Edge Magazine, BlueScope Steel Distribution, issue 1, p 9,
viewed 25 August 2010, <http://www.bluescopedistribution.com.au/content/promotions/docs/
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BlueScope Steel Limited (BSL), InvestSmart 2010, viewed 4/10/2010 at http://www.investsmart.com.au/
company_profile/summary/default.asp?SecurityID=BSL&ExchangeID=ASX
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11. Appendices
Appendix 1: DuPont ROE Inputs
DuPont Inputs EBIT Net Sales Total Assets
Interest
Expense
Net Profit
Before Tax
Common
Equity
Income
Taxes
2005-06
Bisalloy
14,080,000
18,879,000
206,394,000 9,795,000 4,585,000 38,168,000 1,059,000
OneSteel
300,300,000 357,700,000 3,138,800,000 56,700,000 246,000,000 1,126,200,000 60,800,000
BlueScope
718,700,000 851,200,000 7,260,600,000 90,000,000 631,600,000 1,653,900,000 174,700,000
Bradken
59,878,000 76,599,000 367,908,000 11,939,000 48,379,000 83,337,000 14,482,000
2006-07
Bisalloy
11,897,000
15,470,000
286,430,000 9,409,000 2,567,000 40,205,000 3,521,000
OneSteel
337,600,000 402,300,000 3,569,500,000 55,800,000 284,100,000 1,153,600,000 65,200,000
BlueScope
1,081,600,000 1,300,300,000 7,506,200,000 140,700,000 945,700,000 1,896,000,000 229,000,000
Bradken
82,589,000 99,185,000 485,422,000 13,174,000 70,089,000 83,684,000 20,997,000
2007-08
Bisalloy
23,670,000
24,712,000
206,823,000 14,567,000 23,639,000 40,933,000 8,316,000
OneSteel
607,900,000 757,200,000 7,327,800,000 159,600,000 453,200,000 2,929,900,000 104,000,000
BlueScope
1,065,300,000 1,256,200,000 8,466,200,000 131,200,000 940,800,000 2,151,200,000 326,500,000
Bradken
103,614,000 124,400,000 597,121,000 20,065,000 83,990,000 81,039,000 25,493,000
2008-09
Bisalloy
32,378,000
16,583,000
55,019,000 2,382,000 30,029,000 60,627,000 7,835,000
OneSteel
351,900,000 489,500,000 6,933,100,000 172,200,000 184,100,000 3,735,200,000 - 16,500,000
BlueScope
156,900,000 440,700,000 8,864,600,000 134,400,000 28,700,000 4,032,600,000 - 14,200,000
Bradken
116,816,000 143,794,000 957,566,000 35,476,000 81,654,000 223,460,000 24,508,800
2009-10
Bisalloy
4,234,000
5,138,000
48,148,000 3,492,000 763,000 65,539,000 346,000
OneSteel
411,200,000 572,000,000 7,067,700,000 89,200,000 324,000,000 3,751,100,000 80,300,000
BlueScope
233,000,000 554,300,000 8,997,600,000 112,100,000 130,300,000 4,032,400,000 - 25,500,000
Bradken
136,043,000 170,503,000 983,829,000 30,484,000 105,722,000 302,838,000 28,512,000
Appendix 2: Excel Regression Output- Steel Production & Sales Growth
SUMMARY
OUTPUT
Regression Statistics Regression Statistics
Multiple R 0.768103096
R Square 0.589982366
Adjusted R Square 0.50797884
Standard Error 0.199952316
Observations 7
ANOVA
df SS MS F
Significance
F
Regression 1 0.28764669 0.28764669 7.194597477 0.043700912
Residual 5 0.199904644 0.039980929
Total 6 0.487551334
Coefficients
Standard
Error t Stat P-value Lower 95% Upper 95%
Lower
95.0% Upper 95.0%
Intercept
-1.52119034
1 0.625882015 -2.4304746 0.059345946 -3.13007128 0.087690598
-3.1300712
8 0.087690598
Steel Production 0.000226273 8.43588E-05 2.682274683 0.043700912 9.42227E-06 0.000443125
9.42227E-0
6 0.000443125
72
Appendix 3: Excel Regression Output- Beta Calculation
SUMMARY OUTPUT SUMMARY OUTPUT
Regression Statistics Regression Statistics
Multiple R 0.33461983
R Square 0.11197043
Adjusted R Square 0.09691908
Standard Error 14.1895224
Observations 61
ANOVA
df SS MS F Significance F Significance F
Regression 1 1497.83329 1497.83329 7.43922892117354 0.00839257
Residual 59 11879.2102 201.342546
Total 60 13377.0435
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0%Upper 95.0%
Intercept -3.329928 1.8199427 -1.8296884 0.07235028500075 -6.9716249 0.3117689 -6.9716249 0.3117689
X Variable 1 0.87313175 0.32012222 2.72749499 0.00839256670682 0.23256867 1.5136948 0.23256867 1.5136948
73

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