OutoKumpu (OUT1V.HE)

After the August scare, the long term picture is becoming clear again. The oil price rise is still a driving factor in energy stock appreciations. Nuclear energy is making a come back on the planning board of energy firms. Where else can you find a cheap way of generating power without emitting green house gases. New engineering designs should allow safer operations, even the spent plutonium could be reused as fuel in modified nuclear reactors. So invest in Nuclear and reap the rewards. Maybe. It still looks like a long shot where the investor is sure to make money in the long term but his rate of return might be difficult to quantify in advance. Permits need to be taken, public opposition might arise in certain parts of the world, accidents with already operating nuclear plants could kill the upward mood. One of the critical component of a nuclear plant is the cooling water to control the reactor temperature. So public authorities can always block a project by not emitting water usage permits. If everything goes well, the time to procure and build a nuclear plant is quite lengthy. The fastest tracks we've seen for new plants are not generating power before 2011. This is a time where the utilities will spend money rather than giving fat dividends.

Is there a safer way?

The answer, I think, resides in the peripheral suppliers which are supplying now, or in the near future, critical components to the nuclear industry. Most of the analysts are focusing right now with the Uranium ore businesses. They are probably right to do so but most of them admit that Uranium is not a particularly rare material.

Tricast would recommend another approach based on its knowledge of the stainless steel and water treatment industries.

Remember the crucial material needed for nuclear operation is water. And industrial use water is becoming a rare thing, at least in the opinion of public officials. There are already some plans to use sea water to cool nuclear plants. As we all know, salt water brings corrosion issues which are very sensitive in a nuclear operation context.


There is a Finnish company called Outokumpu ( OUT1V.HE) which is specialized in custom stainless steels for the water desalination industry. The know-how acquired in these type of applications can also be used for nuclear plant construction. As forecasted, they have formed joint-ventures with Nuclear utility plants in Finland.

If that is the case, the stock must cost a fortune. The good news is; not at all. On September 24th the price was 24,48 Euros. Not bad for a company producing in 2006, 5,31 Euros in EPS and 1,10 Euros in Annual Dividend. Of course they have sold assets to reach those numbers. Considering only the continuing operation EPS of 3,34 Euros, the real PE ratio would be 7,33.

In 2007 with still 2 quarters to go EPS is already at 4,72.


Outokumpu five year stock price performance from 2002 to 2007 is 5 times (5X).

http://stocks.us.reuters.com/stocks/charts.asp?symbol=OUT1V.HE&WTmodLOC=L2-LeftNav-10-Charts

The PE ratio is 2,5, the price to book is close to 1,2. Dividend yield is a very attractive 4,5%.
EPS 5 year growth is higher than 40% which gives us a PEG inferior to one. The PExPB is less than 22,5 by a wide margin. The market cap is 4,4B Euros.

Analysts expect 5,08 in 2007 and 3,72 EPS in 2008. Give them a 10 x PE standard sector ratio and the stock should be worth 37 Euros.

We expect a ROI of 16% per year on the stock.

On the risk side we could have some reverse effect on our return because of the Euro Canadian $ exchange rate, although it has been very stable the last 2 years contrary to the US/CAD exchange rates.

The Debt Equity ratio is 0,4 which is a bit higher than our preferred 0,20 ratio but still reasonable.

The price of stainless could also be affected by the increased Chinese production capacity, but Outokumpu is shifting its market focus towards specialty stainless steel where corrosion know-how and close cooperation with end-user needs will bring strong competitive advantages.