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MarketScreener Homepage  >  Equities  >  Australian Stock Exchange  >  BlueScope Steel Limited    BSL   AU000000BSL0

BLUESCOPE STEEL LIMITED

(BSL)
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BlueScope Steel : Demand Running In BlueScope's Favour

10/25/2020 | 10:05am EST

Concerns surrounding disruptions to BlueScope Steel's business are ebbing, encouraged by first half earnings guidance that is well ahead of prior forecasts.

-Demand for housing/renovations underpins Australian activity
-Yet could this be simply a pulling forward of future demand
-North Star could push the US market into oversupply

 

Demand is running in BlueScope Steel's ((BSL)) favour, despite lingering concerns regarding disruptions stemming from the pandemic. The robust outlook is particularly the case for Australian construction, although Southeast Asia and India have improved notably.

First half earnings guidance is $340m, well ahead of prior broker forecasts and an increase of 30% on the prior half. Robust volumes were recorded across the business in the first quarter and East Asian steel prices are also improving.

In the US, where the automotive industry is recovering, North Star continues to dispatch at full capacity. Macquarie finds a number of supportive aspects in the company's update, including Australian construction, US automotive volumes and stronger realised spreads (the difference between the raw material and finished product price).

Ord Minnett calculates a free cash flow yield of 4% in FY21, rising to 7% in FY22, and now expects Australian Steel Products (ASP) to generate $192m in earnings (EBIT) because of higher coke profit and volume growth as well as slightly better prices. A minor improvement in New Zealand is expected.

The stronger cash flow should facilitate capital management too, with Morgan Stanley now forecasting a FY21 free cash flow yield of 14%. A reactivation of the buyback is expected from the second half of FY21.

As always, Morgan Stanley believes spreads will be the main driver of earnings and these are well likely to deliver an even stronger second half, although the current share price is assessed to be capturing the improvement.

Citi now assumes Australian domestic dispatches are flat in FY21. Government stimulus appears to be working well for home builders and alterations & additions are particularly strong. This could be a pulling forward of future demand, the broker warns.

Hence, it is unknown what sort of growth will occur in FY22 as stimulus rolls off. How much is a catch up with demand and how much is a pulling forward is open to debate, UBS agrees, albeit the risks are still to the upside for BlueScope Steel.

Greater demand for detached housing and renovations has underpinned Australian activity and the broker assesses BlueScope continues to take market share from tiles and timber framing. Such tailwinds are unlikely to abate, which provides upside risk to ASP earnings. UBS forecasts 4% per annum growth over the next three years for Colorbond, to 49% of total ASP volumes.

Colorbond is already around 50% of new detached homes in Australia, supported by its superior access in regional areas compared with tiles, and as it is lightweight this allows for greater spans in construction. Moreover, the pandemic could push more buyers into areas that favour Colorbond.

North Star

While North Star did not contribute to the materially better performance in the first half, Ord Minnett suggests the improved earnings profile is still impressive because of the elevated capital expenditure required for the North Star expansion.

Morgan Stanley notes steel production capacity in the US has been fairly stable over the past 10 years and as a best-in-class asset, North Star typically operates above the industry average of 60-80%, having run at close to 100% since 2011.

Credit Suisse finds building products in North America and Asia are often under-appreciated relative to the earnings potential of ASP/North Star, and while still envisaging risks around volumes because of pandemic-related disruptions accepts the risk is moderating.

Building products in Asia and North America will deliver a considerably better performance in the first half , Citi believes. Both Southeast Asia and India have improved significantly, the broker adds, although remain subject to the risk of disruptions.

Spreads

Spot steel spreads are at $346/t for ASP and US$367/t for North Star, which point to stronger realised spreads in the second half. UBS forecasts a first half spread of US$270/t for the latter, lifting to US$300/t in the second half, with US$260/t for the long-term.

US steel supply remains constrained, which is underpinning high steel prices and spreads that are well above the long-term average, the broker adds. Still, while high spreads could persist for longer than previously expected, the trajectory is heading lower.

UBS also believes it likely North Star will put the market into oversupply. The local North Star market is expected to be around 10% oversupplied by 2023 and this is why BlueScope Steel has a very conservative 18-months ramp-up.

The broker points to more US electric arc furnace production and China's re-entry the scrap market as risks for the company. Around 50% of North Star steel production is sold into the automotive industry with the remainder split between construction, agriculture and other industries.

FNArena's database has three Buy ratings and three Hold. The consensus target is $16.07, suggesting 0.7% upside to the last share price. Targets range from $11.50 (Morgan Stanley) to $19.20 (Ord Minnett).

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© 2020 Acquisdata Pty Ltd., source FN Arena

Stocks mentioned in the article
ChangeLast1st jan.
BLUESCOPE STEEL LIMITED -1.16% 17.1 End-of-day quote.13.55%
MORGAN STANLEY 2.35% 63.28 Delayed Quote.23.79%
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Financials
Sales 2021 11 667 M 8 599 M 8 599 M
Net income 2021 690 M 508 M 508 M
Net cash 2021 642 M 473 M 473 M
P/E ratio 2021 12,3x
Yield 2021 0,94%
Capitalization 8 665 M 6 379 M 6 387 M
EV / Sales 2021 0,69x
EV / Sales 2022 0,65x
Nbr of Employees 14 000
Free-Float 99,4%
Chart BLUESCOPE STEEL LIMITED
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Technical analysis trends BLUESCOPE STEEL LIMITED
Short TermMid-TermLong Term
TrendsBullishBullishBullish
Income Statement Evolution
Consensus
Sell
Buy
Mean consensus OUTPERFORM
Number of Analysts 11
Average target price 18,71 AUD
Last Close Price 17,20 AUD
Spread / Highest target 23,3%
Spread / Average Target 8,80%
Spread / Lowest Target -26,7%
EPS Revisions
Managers
NameTitle
Mark Royce Vassella Chief Executive Officer, MD & Director
John Andrew Bevan Chairman
Tania Archibald Chief Financial Officer
Penolope Bingham-Hall Independent Non-Executive Director
Ewen Graham Wolseley Crouch Independent Non-Executive Director
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