Lower bid for ASARCO – positive for Sterlite
BUY
CMP: Rs250 Target Price: Rs301
Sterlite Industries Ltd (SIL) launched new bid for ASARCO, American copper smelting and refining company, US, having a smelting capacity of 0.25mtpa and 3 copper mines with a total reserve of 5mt in copper. SIL will make an upfront payment of USD1.1bn and an additional payment of USD0.6bn staggered over a period of 9 years, which will be non-recourse to SIL; i.e. this amount will be paid through the earnings of ASARCO over the period of 9 years. The USD0.6bn will be paid with annual installments of USD20mn from the end of 2nd year for a period o f 7 years and a terminal payment of USD460mn. There is an additional clause that if annual average of daily copper prices in a particular year increases beyond USD6,000/t, then the annual installments will be proportionately increased subject to a maximum of USD66.67mn, keeping total payment to USD0.6bn. The discounted value of USD0.6bn comes to around USD0.33bn assuming payment of USD20mn every year and assuming total payment of USD66.67mn every year, discounted value comes to around USD0.39bn. The acquisition will be on “cash free debt free” basis, implying no cash and no legacy debt (pertaining to asbestos and environmental claims) has been taken over. The valuation of ASARCO by SIL comes to around 6x EV/EBITDA. The current bid amount is significantly lower than the previous bid of USD2.6bn and seems to be fair valuation of ASARCO considering the current copper prices at LME. As per the management, the acquisition will be entirely funded through existing cash with SIL and no additional debt will be raised. SIL currently has gross cash to the tune of USD2bn on standalone basis. We view the likely acquisition as positive for SIL and expect SIL to improve the performance of the company further given its ability to turn around companies (like BALCO, HZL, MALCO). Sterlite reported EPS of Rs62.3 for FY08. Our consolidated EPS for FY09E and FY10E currently stands at Rs47.9 and Rs42.5 respectively. However, our EPS numbers may be upgraded to reflect the numbers of ASARCO post acquisition. We do not have full financial details of ASARCO. However, taking management guidance of EBITDA of USD1,000/t and production of 240,000t of copper, we feel there could be an EPS accretion of around Rs8-10 for SIL. However, these numbers are based on back of the envelope calculations and the actual numbers may vary. At CMP of Rs250, the stock is trading at 0.55x FY09E book value and at 0.5x FY10E book value.
No comments:
Post a Comment