Sample(2010) Bisalloy

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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 H2FY10 H1FY09 H2FY09 H1-5

0

10

15

20$m

17.5

(-0.4)0.0

5.75

43.6

34.5

24.7

18.1

June 10Dec 09June 09Dec 080

10

30

40

50$m

20

EBITDA before FX Borrowings

Company Valuation ReportSeptember 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! 282

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 BISOfficial Listing Date 23 June, 2003

GICS Industry Group Capital GoodsExempt Foreign NoInternet Address http://www.bisalloy.com.au

Registered Office Address 18 Resolution Drive, UNANDERRA, NSW, AUSTRALIA, 2526Current Share Price $0.17 (as of COB 3/09/2010)

*Source: Australian Security Exchange (ASX) 2010

1.1 OverviewBisalloy 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 HistoryBisalloy 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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http://www.bisalloy.com.au

http://www.bisalloy.com.au

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 PerformanceThe 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 StructureBisalloy 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 & FacilitiesBisalloy 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, 80VBisplate HHA, HTA, UHTA,

HAI Class 1 & 2

Application/useDump 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 Plate10%

Structural Plate35%

Wear Plate55%

*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 SegmentationCustomer 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 Asia



9%

6%BlueScope3%

Armour Manufacturers8%

Bisalloy Asia11%

Local Distributors50%

Caterpillar13%

Agriculture3.0%

General Engineering5.0%

Military10.0%

Mining70.0%

Transport12.0%



End-Users

Other



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 ObjectivesAfter 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 Australiad) Roll-out to market in FY10-11 of increased range of wear grade plate to eliminates gap in product

portfolioe) Armour plate growth domestically and internationallyf) 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 AdvantageBisalloy 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

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Outlook

Although the Company operates within the steel sector its marketing mix indicates a strong leverage to the resource sector.

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.

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).

PEAKH1 FY09

STABALISEH1 FY10

RECOVERH2 FY10

GROWDOWNTURNH2 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.

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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 StructureBisalloy 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 StructureThere 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

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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 ChairmanPhillip Cave


Bisalloy AsiaPT 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 & CEORobert 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 DirectorGraeme Pettigrew

Non-Executive DirectorRichard Grellman

Non-Executive DirectorKym 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 OverviewThe 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 IndicatorsIt 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 vol 17 no 2 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 PricesInflationary 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 declineIncreasing 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).

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17

Interest RatesSince 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 RatesThe 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-termThe 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 OutlookEconomies 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 OverviewBisalloy 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 segmentationSteel 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 Asia





End-Users

Other


Australia, Singapore & Taiwan3.2%

South Korea6.1%

India6.3%

Japan20.9%

China63.5%

Aluminium4.8%

Steel9.9%

Base Metals15.8%

Precious Metals & Minerals16.7%

Coal52.8%


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 CompetitorsThe 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.

ArcelorMittalThe 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 CorporationThe 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).

POSCOPOSCO 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).

Australia0.9%

Taiwan2%

South Korea6.5%

India7.8%

Japan12.5%

China70.2%

*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 PMArcelorMittal 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 SupportingCompany

The steel company ArcelorMittal has become the 40th extractive company to become an International-level EITISupporting Company. On 22 January 2009, ArcelorMittal confirmed its support of the Extractive IndustriesTransparency 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, andit 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 theleader in the steel industry brings unique responsibilities... The EITI's principles regarding the prudent use of naturalresources, transparency, accountability, and stakeholder dialogue complement ArcelorMittal's own corporate valuesand 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.

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20/09/10 6:10 PMJapan'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

News was prepared under the informationsupport of Online Daily Newspaperon Hellenic and international Shipping "Hellenic Shipping News".

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 ensuresupplies of raw materials. Nippon has taken the stake in Foxleigh, an open-cut mine in Queensland's Bowen Basin, from Japanese trading houseITOCHU Corporation. Foxleigh is one of only a small number of mines in Australia with very low ash content and is well suited to making pulverisedcoal 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 alliancerelationship 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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20/09/10 6:12 PMDecision delayed over granting mining license to Posco | TopNews Singapore

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Decision delayed over granting mining license toPoscoSubmitted by Jaideep Kumar on 2010, July 15 - 13:26 Mining Sector Featured TNM Posco

The High Court of Orissa on Wednesday has set aside therecommendation of the government of Orissa to grant aprospecting license to the South Korean steel company

Posco, in the iron ore mines at Khadadhar in Sundargarh district. This could be a setbackto the 51,000crore steel plant to be set up by Posco at Paradeep. In 2009 January, thegovernment had recommended that Posco be granted a license for prospecting in theKhadadhar mines in a2500 hectare area. However, Division bench that comprises of Justice BP Ray and JusticeBP Das, allowed a writ petition that was filed by Geomin Minerals and Marketing based inBhubaneswar.

Geomin Minerals had termed the decision illogical and arbitrary and claimed that the firstapplication 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 thelicense giving the petitioned a preferential right of consideration. According to the bench,the petitioned had preferential right for consideration and the recommendation in favor ofPosco was invalid. Geomin Minerals has also urged the court to restrain the stategovernment from considering applications files after its application and has sought anorder 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 absenceof an alternate remedy was maintainable. Hence the High Court has directed thegovernment to dispose of all pending applications of petitioner in the next 4 months. Adozen more petitions were tagged to the original petition from Geomin minerals, whichinclude an intervention petition that was filed by Visa Steel. The petition of Visa steel wasrejected by the Bench though and they were asked to file an independent writ petition.

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Baosteel Group CorporationThe 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 GroupThe 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 LimitedThe 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 LimitedManufactures 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 AnalysisThe 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 entrantsThe 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 PMChina Vibration Damping Steel Sheet, Steel Hollow Section, Steel Tub…cturer - Shanghai Baosteel Construction Design & Research Institute

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Shanghai Baosteel Construction Design & Research Institute

Shanghai Baosteel Construction Design&Research Institute who established in the year 1981 is one subsidiary of BaosteelGroup, and mainly engaged in the development and production of Vibration Damping Steel Sheet, Cold-rolled FormingSteel Hollow Section, investigation for the advanced process of metallurgy and equipment, and engineering design.

Shanghai Baosteel Institute mainly ... [ Click for Details ]

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Business Type: ManufactureNumber of Employees: 201 ~ 500Business Scope: Auto Parts & Accessories, Metallurgy, Mineral & Energy, Construction & DecorationMember Since: 2003Last 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

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20/09/10 6:18 PMTata Steel | TopNews

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Tata SteelTata Steel not to do away with S. African unitSubmitted by Keshav Seth on Wed, 09/08/2010 - 16:22. Company News Steel SectorFeatured TNM Tata Steel India

Indian steel major, Tata Steel has said that it will not be sellingoff its South African unit and will be putting in money to revampand get the operations going. The information was given by acompany official in reply to the queries that asked about itsearlier 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 theyhad 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 530Submitted by Shilpa Mahapatre on Thu, 08/12/2010 - 08:20. Analyst View Stock TradingBuzzing 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 stockwith stop loss of Rs 530.

Today, the shares of the company opened at Rs 517 on theBombay 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 June30.

» Add new comment Read more

Tata Steel sales drop in India, shares downSubmitted by Keshav Seth on Wed, 07/07/2010 - 22:22. Company Updates Steel SectorFeatured TNM Tata Steel India

Eighth largest steel maker in the world, Tata Steel has seen adrop in the sales of the company in India.

To be precise the sales remained flat at 1.4 million tons duringthe first quarter ending June 2010. What is hurting theeconomy more is the fact that the domestic demand, which

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20/09/10 6:19 PMWorld Expo 2010 Shanghai - Pavilions

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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'smeteorologists to improve weather forecasting ability to better serve the country'ssocial and economic development.

Weather forecasting is important in carrying out disaster relief, safeguarding people'slife 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 redcurtain and a sightseeing cable car, the SwissPavilion has turned out to be one of the hottestpavilions at the Shanghai World Expo.

"The most distinguished features of the pavilionare its curtain of woven aluminum and chairliftride," said Andreas Schmucki, Chief Operating

Officer of the Swiss Pavilion. "Our country is portraying itself through an exhibition onthe 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 theShanghai World Expo Park, making the UN Pavilion the first international pavilion to joinin 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 SteelAzure weathering steel panels to clad the exterior of theAustralian Pavilion at the 2010 Shanghai World Expo.

According to Facade Solutions, the Azure weathering steel panelshave 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 thousandvisitors from various nationalities visitedthe Yemeni pavilion in the festiveceremony in the exhibition area of EXPO2010 Shanghai.

In a statement to Saba, Director ofExhibitions at the Ministry of Industry

and Trade Abdul Kareem Senan said Yemen's participation in this international eventunder the slogan of "Yemen Civilization and Art" is an opportunity to introduce thecivilization, history and tourism of Yemen.

Click here >> more info...

20/09/10 6:20 PMOneSteel - Steel manufacturer and distributor

Page 1 of 1http://www.onesteel.com/

OneSteel is a fully integrated, global manufacturer and distributor of steel andfinished steel products, self-sufficient in both iron ore and scrap metal, with revenuesin 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 throughoutregional Australia.

Additionally, OneSteel has more than 40 operating facilities in New Zealand, Asia andthe Pacific that encompass major manufacturing sites and recycling locations.OneSteel also operates eight facilities in the United States consisting of GrindingMedia, LiteSteelTM Technologies, Recycling and a ferrous shredder in Tampa, Florida.

In total OneSteel services more than 30,000 customers, offers more than 40,000products globally and employs over 10,500 people.

OneSteel manufactures and distributes structural, rail, rod, merchant bar, coldfinished bar, chrome plated bar, reinforcing, wire, tube, pipes, fittings, valves andactuation, 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 - RosemaryWarnock13/9/2010 moreASX Appendix 3B - Exercise ofOptions8/9/2010 moreSteel & Tube Holdings Limited -Christchurch Earthquake7/9/2010 moreASX Appendix 3B - GeoffPlummer3/9/2010 moreASX Appendix 3Y - GeoffPlummer2/9/2010 moreRefinancing of Loan Facility1/9/2010 moreASX RELEASE 25 August 201025/8/2010 moreChange in SubstantialShareholder Notice - BlackrockInvestment Management(Australia) Limited23/8/2010 more

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Strengthening OneSteel2009 Interactive Annual Report

2010Full YearResultsWebcastTuesday, 17Aug 2010

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23

Supplier PowerSupplier 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 PowerBuyer 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 substitutesThreat 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 RivalryCompetitive 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 OutlookAs 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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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 ProjectionsBased 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 ConsumptionWorld 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 ProductionWorld 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 OverviewOneSteel 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 LimitedBisalloy 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 EquityReturn 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

Figu

re 1

3: E

xten

ded

Dup

ont R

OE

Cal

cula

tion

for B

isal

loy

& it

s Pe

ers

(200

5 to

201

0)Fi

gure

13:

Ext

ende

d D

upon

t RO

E C

alcu

latio

n fo

r Bis

allo

y &

its

Peer

s (2

005

to 2

010)

Figu

re 1

3: E

xten

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Dup

ont R

OE

Cal

cula

tion

for B

isal

loy

& it

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ers

(200

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0)Fi

gure

13:

Ext

ende

d D

upon

t RO

E C

alcu

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Figu

re 1

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xten

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Cal

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(200

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ende

d D

upon

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r Bis

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re 1

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Cal

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ende

d D

upon

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re 1

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ont R

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Cal

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isal

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DuP

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78

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DuP

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ate

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l Ass

ets

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ncia

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Com

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x R

eten

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ate

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urn

on E

quity

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r Ave

rage

*

2005

-06

Bis

allo

y74

.58%

0.09

6.82

%4.

75%

2.08

%5.

408

12.0

1%0.

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24%

23.4

2%O

neS

teel

83.9

5%0.

119.

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1.81

%7.

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2.79

21.6

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7516

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23.4

2%B

lueS

cope

84.4

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129.

90%

1.24

%8.

66%

4.39

038

.01%

0.72

27.5

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.42%

Bra

dken

78.1

7%0.

2116

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3.25

%13

.15%

4.41

558

.05%

0.70

40.6

7%

23.4

2%

2006

-07

Bis

allo

y76

.90%

0.05

4.15

%3.

28%

0.87

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124

6.38

%-0

.37

-2.3

7%

28.1

8%O

neS

teel

83.9

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119.

46%

1.56

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3.09

424

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0.77

18.8

2%28

.18%

Blu

eSco

pe83

.18%

0.17

14.4

1%1.

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12.5

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959

49.6

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7637

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8%

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2017

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2.71

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5.80

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0.70

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6%

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adw

ay15

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0.52

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408

13.1

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506.

51%

2007

-08

Bis

allo

y95

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0.12

11.4

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11.4

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57.7

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2.18

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2.50

115

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Blu

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0.15

12.5

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11.1

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936

43.7

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37.5

2%

Bra

dken

83.2

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2117

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3.36

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.07%

7.36

810

3.64

%0.

7072

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37.5

2%

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adw

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0.48

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7%2.

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-4.0

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08-0

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loy

96.4

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4.33

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0.90

749

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0.74

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1%

17.1

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neS

teel

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1.85

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1.09

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0.05

1.77

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0.25

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198

0.71

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Bra

dken

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0.70

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adw

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6%2.

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2009

-10

Bis

allo

y82

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0.11

8.79

%7.

25%

1.54

%0.

735

1.16

%0.

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9.04

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8.58

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lueS

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1.25

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2.23

3.00

%1.

203.

58%

9.04

%

Bra

dken

79.7

9%0.

1713

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3.10

%10

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3.25

34.9

1%0.

7325

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9.04

%

* E

xclu

des

Bro

adw

ay d

ue to

lack

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dat

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r 200

9-10

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5-06

* E

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xes

2005

-06

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2006

-07

30

4.2.1 Operating Profit MarginThe 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 TurnoverTotal 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 AssetsReturn 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 RateThe 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 AssetsThis 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 EquityThis 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 RateThe 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.

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Figure 14: Historical ROE Average (2005-06 to 2009-10)

4.3 Business RiskBusiness 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 LeverageBusiness 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

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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 RISKBUSINESS RISKBUSINESS RISKBUSINESS RISKBUSINESS RISKStandard Deviation of OE= 7665372 173576766 404725978 57445110

Mean of OE= 18787000 427125000 998250000 87915250Business Risk 40.8% 40.6% 40.5% 65.3%

SALES VARIABILITYSALES VARIABILITYSALES VARIABILITYSALES VARIABILITYSALES VARIABILITYStandard 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 8,054,200,000 711,666,143Sales Variability 52.6% 35.7% 23.1% 42.5%

OPERATING LEVERAGEOPERATING LEVERAGEOPERATING LEVERAGEOPERATING LEVERAGEOPERATING LEVERAGESum % Change Ratio 24.5552 25.2205 145.3429 14.5426

Number of Periods 7.0 7.0 7.0 6.0Operating Leverage 350.8% 360.3% 2,076.3% 242.4%

* Inputs to calculations shown in appendix ??

4.3 Financial RiskThe 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.

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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 RATIODEBT-EQUITY RATIODEBT-EQUITY RATIODEBT-EQUITY RATIO

Total Long-Term Debt Total Equity

Debt-Equity Ratio

2009-10Bisalloy 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%

2008-09Bisalloy 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%

2007-08Bisalloy (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%

2006-07Bisalloy (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%

2005-06Bisalloy (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 RatioAverage Debt-Equity RatioAverage Debt-Equity RatioAverage Debt-Equity RatioBisalloy 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%

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INTEREST COVERAGE RATIOINTEREST COVERAGE RATIOINTEREST COVERAGE RATIOINTEREST COVERAGE RATIO

EBIT Interest ChargesInterest

Coverage Ratio2009-10

Bisalloy 4,234,000 3,492,000 1.21OneSteel 411,200,000 89,200,000 461%BlueScope 233,000,000 112,100,000 208%Bradken 136,043,000 30,484,000 446%

2008-09Bisalloy 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%

2007-08Bisalloy (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%

2006-07Bisalloy (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%

2005-06Bisalloy (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 RatioAverage Interest Coverage RatioAverage Interest Coverage RatioAverage Interest Coverage RatioBisalloy 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%

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5. Future Earnings for Bisalloy

5.1 Factors Affecting EarningsThere 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 SectorBisalloyʼs 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 AMRBA: SMP - Aug 2010-Graph 44

Page 1 of 1http://www.rba.gov.au/publications/smp/2010/aug/graphs/graph-44.html

Graph 44

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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 EconomiesIn 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 InitiativesIn 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.

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Risks to Future EarningsThe 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 ForecastAs 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 GrowthThe 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%

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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 GrowthObviously 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)

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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 AssumptionsForecasts 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 OnwardsPhase 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

NOTES1. Revenue growth calculated using regression model y= 0.00023x-1.52119 on which adjustments have been made subject to economic or company factors1. Revenue growth calculated using regression model y= 0.00023x-1.52119 on which adjustments have been made subject to economic or company factors1. Revenue growth calculated using regression model y= 0.00023x-1.52119 on which adjustments have been made subject to economic or company factors1. Revenue growth calculated using regression model y= 0.00023x-1.52119 on which adjustments have been made subject to economic or company factors1. Revenue growth calculated using regression model y= 0.00023x-1.52119 on which adjustments have been made subject to economic or company factors1. Revenue growth calculated using regression model y= 0.00023x-1.52119 on which adjustments have been made subject to economic or company factors1. Revenue growth calculated using regression model y= 0.00023x-1.52119 on which adjustments have been made subject to economic or company factors2. 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 onwards5. Tax Retention rate is expected to increase gradually increase from 0.65 in 2011-2014 to 0.7 in 2015 onwards5. Tax Retention rate is expected to increase gradually increase from 0.65 in 2011-2014 to 0.7 in 2015 onwards5. Tax Retention rate is expected to increase gradually increase from 0.65 in 2011-2014 to 0.7 in 2015 onwards5. Tax Retention rate is expected to increase gradually increase from 0.65 in 2011-2014 to 0.7 in 2015 onwards5. Tax Retention rate is expected to increase gradually increase from 0.65 in 2011-2014 to 0.7 in 2015 onwards5. Tax Retention rate is expected to increase gradually increase from 0.65 in 2011-2014 to 0.7 in 2015 onwards6. 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 Assets6. 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 Assets6. 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 Assets6. 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 Assets6. 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 Assets6. 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 Assets6. 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

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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) EstimationBeta 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).

MethodThe 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

ResultsThe 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 14.1914.19

Adjusted R2 0.09690.0969

F-statistic: p-value 0.00840.0084

Multiple R 0.33460.3346

R Square 0.11200.1120

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 R2 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 R2 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 AdjustmentsUsing 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. SmoothingSmoothing 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 ComparisonAn 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 CalculationThe 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 RRRThe 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 & MRPREQUIRED RATE OF RETURNREQUIRED RATE OF RETURNREQUIRED RATE OF RETURNREQUIRED RATE OF RETURN

Market Risk PremiumMarket Risk PremiumMarket Risk PremiumMarket Risk PremiumMarket Risk PremiumMarket Risk PremiumMarket Risk PremiumMarket Risk PremiumMarket 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 10.770.88 5.44 6.32 7.20 8.08 8.96 9.84 10.72 11.60 12.481.08 5.54 6.62 7.70 8.78 9.86 10.94 12.02 13.10 14.181.28 5.65 6.93 8.21 9.49 10.77 12.05 13.33 14.61 15.891.48 5.75 7.23 8.71 10.19 11.67 13.15 14.63 16.11 17.591.68 5.85 7.53 9.21 10.89 12.57 14.25 15.93 17.61 19.291.88 5.96 7.84 9.72 11.60 13.48 15.36 17.24 19.12 21.002.08 6.06 8.14 10.22 12.30 14.38 16.46 18.54 20.62 22.702.28 6.17 8.45 10.73 13.01 15.29 17.57 19.85 22.13 24.41

DIVIDEND GROWTH RATEDIVIDEND GROWTH RATEDIVIDEND 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) GrowthDividend Payout RatioDividend Payout RatioDividend Payout Ratio 5.45% 11.57% 14.46% 17.60% 18.22% DDM ValuationDDM Valuation 0.68

Sector AverageSector Average 6.47% 5.10% 10.82% 13.52% 16.46% 17.04% 0.88Industry AverageIndustry Average 14.09% 4.68% 9.94% 12.42% 15.12% 15.65% 1.08S&P 500 AverageS&P 500 Average 36.04% 3.49% 7.40% 9.25% 11.26% 11.65% 1.28Peer AveragePeer Average 65.89% 1.86% 3.95% 4.93% 6.00% 6.21% 1.48Bisalloy AverageBisalloy Average 81.19% 1.03% 2.18% 2.72% 3.31% 3.43% 1.68

1.882.082.28

The lower the dividend payout, the higher the dividend growthThe lower the dividend payout, the higher the dividend growthThe lower the dividend payout, the higher the dividend growthThe lower the dividend payout, the higher the dividend growthThe lower the dividend payout, the higher the dividend growthThe 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

ValuationSHARES & 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 RateThe 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











***Constant Growth:








4

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Table 9: Relative Dividend Payout Ratios

Dividend Payout RatioDividend Payout RatioDividend Payout RatioSector AverageSector Average 6.47%

Industry AverageIndustry Average 14.09%S&P 500 AverageS&P 500 Average 36.04%

Peer AveragePeer Average 65.89%Bisalloy AverageBisalloy 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


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 RatioDividend Payout RatioDividend Payout Ratio 2012.00 15.00%

Sector AverageSector Average 6.47% 2013 25Industry AverageIndustry Average 14.09% 2014 35S&P 500 AverageS&P 500 Average 36.04% 2015 50Peer AveragePeer Average 65.89% 2016 55Bisalloy AverageBisalloy Average 81.19% 2017.00 60.00%

2018.00 65.00%

DuPont Inputs EBIT Net Sales Total

AssetsInterest

ExpenseNet Profit

Before TaxCommon

EquityIncome Taxes no disportionate increase in costs to make these salesno disportionate increase in costs to make these salesno disportionate increase in costs to make these salesno 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 industry7.8% growth expected in the industry7.8% growth expected in the industry7.8% growth expected in the industry2015-18F 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 salesinventories for 1 dollar of salesinventories for 1 dollar of salesinventories for 1 dollar of sales

2018 Onwards2018 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 inventoryratio of sales to inventoryratio of sales to inventory

3327951.00 3327950.00508

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 ScenarioGrowth Scenario ROE Dividend Payout RatioDividend Payout RatioRention Rate Growth Rate2010-11 No Dividends declaredNo 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 RatioDividend Payout RatioDividend Payout Ratio2018 onwardsStable Steel Production Growth (3.9%)5.45% 0.1409 (1) 0.8591 4.69% Sector AverageSector Average 6.47%

(1Based on Industry Average)(1Based on Industry Average)(1Based on Industry Average) Industry AverageIndustry Average 14.09%S&P 500 AverageS&P 500 Average 36.04%Peer AveragePeer Average 65.89%Bisalloy AverageBisalloy Average 81.19%

Payment n g Dividend Discount Factor PV

Growth PhaseGrowth PhaseGrowth PhaseGrowth PhaseGrowth PhaseGrowth PhaseJun-12 0 0.00% 0.013 0.013 11940170Jun-13 1 16.97% 0.015 0.87 0.0132Jun-14 2 16.97% 0.018 0.78 0.0138 Where D@ t=0 isWhere D@ t=0 is 1682369.9

Stabilisation PhaseStabilisation PhaseStabilisation PhaseStabilisation PhaseStabilisation PhaseStabilisation PhaseJun-15 3 13.61% 0.020 0.69 0.0139 common equitycommon 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 0.0139Jun-18 6 13.61% 0.030 0.47 0.0140 0.09571888

Constant GrowthConstant GrowthConstant GrowthConstant GrowthConstant GrowthConstant Growth2018 onwards 6 5.28% 0.3164 0.47 0.149

Value @ June 30 2012 Value @ June 30 2012 0.245PV @ 30 September 2010PV @ 30 September 2010 0.2183197

DDM USING INDUSTRIALS SECTOR AVERAGE PAYOUT RATIODDM USING INDUSTRIALS SECTOR AVERAGE PAYOUT RATIODDM USING INDUSTRIALS SECTOR AVERAGE PAYOUT RATIODDM USING INDUSTRIALS SECTOR AVERAGE PAYOUT RATIODDM USING INDUSTRIALS SECTOR AVERAGE PAYOUT RATIODDM USING INDUSTRIALS SECTOR AVERAGE PAYOUT RATIOn g Dividend Discount Factor PV 11940170

High Growth PeriodHigh Growth Period

D0 Jun-12 0.00% 0.012 0.012 754618.74D1 Jun-13 1 17.04% 0.014 0.88 0.01218414D2 Jun-14 2 17.04% 0.016 0.78 0.01258078Declining Growth PeriodDeclining Growth Period

D3 Jun-15 3 16.46% 0.019 0.69 0.01292596

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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 AnalysisThe 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 RateEffectively, 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 0.115243.00% 0.13972 0.13448 0.13036 0.12703 0.12429 0.12221 0.12005 0.118375.28% 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 0.1426913.62% -0.01257 -0.06038 -0.18347 -1.21835 0.58206 0.31366 0.22594 0.1910916.97% 0.04077 0.03095 0.01688 -0.00497 -0.04349 -0.11645 -0.49328 1.0573320.00% 0.05711 0.05262 0.04696 0.03959 0.02962 0.01705 -0.00673 -0.0454825.00% 0.06930 0.06735 0.06509 0.06244 0.05929 0.05591 0.05082 0.04492

DIVIDEND GROWTH RATEDIVIDEND GROWTH RATEDIVIDEND 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%

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7.2 Present Value of Free Cash Flow to EquityThe 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 '000NPAT (3,892)Capital Expenditure 2,340Depreciation 1,179(Cap Ex – Depreciation) 1,161Debt Ratio 87%(Cap Ex – Depreciation)*(1- Debt Ratio) (1) 151Change in Working Capital 14,793Debt Ratio 87%(Change in Working Capital)*(1 – Debt Ratio) (2) 1,923NPAT 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)

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7.2.1 Estimating the FCFE Growth RateHistorically, 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 2005NPAT 417 (3,892) (63,255) (1,062) (4,002) 13,177Capital Expenditure 950 2,340 3,198 6,987 6,362 8,006Depreciation 904 1,179 5,460 4,846 5,652 4,802Debt Ratio 60% 87% 109% 80% 59% 61%Changes in Working Capital 22,927 14,793 (166,232) 39,153 (32,082) 15,246FCFE (8,772) (5,966) (78,419) (9,321) 8,861 5,982Average number of shares on issue ('000) 216,456 188,223 104,568 103,682 101,368 98,500FCFE (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 30th of June)

Recovery phaseGrowth phasesGrowth phasesGrowth phasesGrowth phases

Recovery phasePhase 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

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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 RecoveryGrowth PhasesGrowth PhasesGrowth PhasesGrowth PhasesGrowth PhasesGrowth PhasesGrowth PhasesGrowth Phases

Actual Recovery Phase 1 Phase 2Phase 2Phase 2 Phase 3Phase 3Phase 3 Phase 4Year 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* 44.70Time Period 0 1 2 3 4 5 6 7 8 9Discounted 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 AnalysisFCFE 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 PremiumMarket Risk PremiumMarket Risk PremiumMarket Risk PremiumMarket Risk PremiumMarket Risk PremiumMarket Risk PremiumMarket Risk PremiumMarket 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 0.101.88 1.05 0.59 0.39 0.28 0.21 0.16 0.13 0.10 0.082.08 1.01 0.54 0.35 0.25 0.18 0.14 0.11 0.08 0.07

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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 2Growth Phase 2Growth Phase 2Growth Phase 2Growth Phase 2Growth Phase 2Growth Phase 2Growth Phase 3 25% 30% 35% 40% 45% 50% 55%

5% 0.09 0.11 0.12 0.14 0.16 0.18 0.208% 0.10 0.11 0.13 0.15 0.17 0.19 0.2111% 0.11 0.12 0.14 0.16 0.18 0.20 0.2314% 0.12 0.13 0.15 0.17 0.20 0.22 0.2417% 0.13 0.14 0.16 0.19 0.21 0.24 0.2620% 0.14 0.16 0.18 0.20 0.23 0.25 0.2823% 0.15 0.17 0.19 0.21 0.24 0.27 0.3026% 0.16 0.18 0.20 0.23 0.26 0.29 0.3229% 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











***Constant Growth:








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 & EPSTable 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 30th of June 2010 2009 2008 2007 2006 2005 2004Basic 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:

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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 RateNet Before Tax/

Total Assets


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 RatioDividend Payout RatioDividend Payout Ratio 2012.00 15.00%

Sector AverageSector Average 6.47% 2013 25Industry AverageIndustry Average 14.09% 2014 35S&P 500 AverageS&P 500 Average 36.04% 2015 50Peer AveragePeer Average 65.89% 2016 55Bisalloy AverageBisalloy 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 salesno disportionate increase in costs to make these salesno disportionate increase in costs to make these salesno disportionate increase in costs to make these salesno 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 industry7.8% growth expected in the industry7.8% growth expected in the industry7.8% growth expected in the industry2015-18F 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 salesinventories for 1 dollar of salesinventories for 1 dollar of salesinventories for 1 dollar of sales

2018 Onwards2018 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 inventoryratio of sales to inventoryratio of sales to inventory

3327951.00 332795Growth Phase Period No. of Periods

in PhaseDividend

Payout RatioDividend 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 30th 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.

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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 ComparisonThe 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

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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 2010Share price 0.54 0.15 0.17Book 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 0.05579P/BV -4.7326 3.4122 3.0471

Table 24: BlueScopeʼs Historical Price/Book Ratio

As of 30 June 2008 2009 2010Share price 8.92 2.52 2.10Book 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 3.1567P/BV 2.0486 0.4143 0.6653

Table 25: OneSteelʼs Historical Price/Book Ratio

As at 30 June 2008 2009 2010Share price 6.87 2.55 2.98Book 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 3.3917P/BV 2.0486 0.5992 0.8786

7.4.2 Calculating the P/BV RatioTo 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 firmPt = the price of stock in period tBV t+1 = The end of year book value per share for the firm. ROE= Return on equityPayout ratio = dividends paid per shareg = growth ratek = 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 ModelNTAB = (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

20102010201020102010

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 - - - -

20092009200920092009

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

20082008200820082008

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.

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http://www.bloomberg.com

http://www.bloomberg.com

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 ModelThe 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 ModelThe 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

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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 RatioGiven 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 BackingThe 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.

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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 MethodOn 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.

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• 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.

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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

2005-06Bisalloy 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 2006-07Bisalloy 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 2007-08Bisalloy 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 2008-09Bisalloy 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 2009-10Bisalloy 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 StatisticsRegression StatisticsMultiple R 0.768103096R Square 0.589982366Adjusted R Square 0.50797884Standard Error 0.199952316Observations 7

ANOVA

df SS MS FSignificance

FRegression 1 0.28764669 0.28764669 7.194597477 0.043700912Residual 5 0.199904644 0.039980929Total 6 0.487551334

CoefficientsStandard

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 0.0004431259.42227E-0

6 0.000443125

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Appendix 3: Excel Regression Output- Beta Calculation

SUMMARY OUTPUTSUMMARY OUTPUT

Regression StatisticsRegression StatisticsMultiple R 0.33461983R Square 0.11197043

Adjusted R Square 0.09691908Standard Error 14.1895224Observations 61

ANOVAdf SS MS F Significance FSignificance F

Regression 1 1497.83329 1497.83329 7.43922892117354 0.00839257Residual 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

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Sample(2010) Bisalloy

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