BSL Details

BlueScope Steel Limited (ASX: BSL) is one of the major manufacturers of painted and coated steel products globally. With rich expertise in steel, the company delivers vital components for houses, buildings, structures, automotive, among others. It has a robust global network with over 160 operations and sales offices across 18 countries. BSL has operations across North America, Australia, New Zealand, Pacific Islands, and throughout Asia. It is engaged in delivering innovative steel materials, as well as products, systems, and technologies.

Healthy Performance in FY21 (For the Year Ended 30 June 2021)

• The company has delivered a record underlying EBIT of $1.72 billion in FY21, tripled that of FY20.
• All the operating segments delivered exceptionally well performance supported by strong demand and steel spreads.
• Resultantly, it reported an increase in its net profit after tax (NPAT) to $1.19 billion in FY21, up by $1.10 billion over FY20.
• The company has declared a final unfranked dividend of 25 cents per share, an increase from 8 cents in the PCP. Further, it has announced a special unfranked dividend of 19 cents per share and an on-market buy-back of up to $500 million.

Exhibit 1: Profitability Trend

Source: Analysis by Kalkine Group

An Array of Growth Opportunities

BSL’s balance sheet and cash flow strength allowed the company to concurrently invest for a low carbon future, as well as for long term sustainable earnings growth, and to improve shareholder returns. Additionally, the company holds a strong pipeline of organic opportunities, leveraging growth trends in detached residential construction, e-commerce and logistics, and national infrastructure programs.

These opportunities comprise debottlenecking of North Star post the completion of the current expansion project, along with upscaling of the BlueScope Properties Group, assessing additional coating capacity in Australia to cater demand predominantly from residential construction and the investigation of painting capacity in the Eastern US.

Fortifying Position Through Acquisition

The company, on 5 November 2021, has formed a binding agreement to acquire the ferrous scrap steel recycling business of MetalX LLC, which is the leading supplier of scrap feed to its North Star BlueScope Steel. As per the agreement, the company will acquire two of MetalX’s operating sites, situated in Indiana and in Ohio for a consideration of US$240 million. The transaction of the acquisition of the ferrous scrap steel recycling business of MetalX LLC was completed on 17 December 2021 USA Time as per the terms entered and announced on 5 November 2021. This acquired business will further add to BSL’s extensive US asset footprint of over $3.0 billion.

Signed MoU with Rio Tinto

BSL and Rio Tinto have entered into a memorandum of understanding (MoU) to research as well as design low-emissions processes and technologies for the steel value chain throughout iron ore processing, iron and steelmaking as well as related technologies.

Reaffirmed Earnings Guidance for H1FY22

The company, on 18 November 2021, has confirmed its earlier guidance on its underlying earnings before interest and tax (EBIT) for H1FY22, which is expected to remain between $2.1 billion to $2.3 billion.

Further, the management expects the Australian steel products business to report a significantly better result than 2H FY2021 driven by strength in domestic volumes mainly in higher value products for the building and construction sector, along with robust realised steel spreads.

Besides, record steel pricing and spreads – modestly impacted by higher alloy and conversion costs, including labour is likely to aid North Star BlueScope Steel to deliver a significantly stronger result than 2H FY2021. The Building Products Asia and North America segment is expected to post robust result as compared to 2H FY 2021.

Key Metrics

The company’s gross margin and ROE reported a sharp improvement in FY21 over FY20 to 28.6% and 16.7% from 23.0% and 1.5% in FY20, respectively. Further, the current ratio steadily improved to reach 1.87x in FY21 compared to 1.58x in FY17. Notably, Debt to Equity ratio improved significantly to 0.15x in FY21 compared to 0.19x in FY17 and 0.20x in FY20, depicting reasonable leverage position of the company.

Exhibit 2: Key Financial Metrics

Source: Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form 17.28% of the total shareholding while the top four constitute the maximum holding. Notably, The Vanguard Group, Inc. and BlackRock Institutional Trust Company, N.A. are holding a maximum stake in the company at 5.14% and 3.96%, respectively, as also highlighted in the chart below.

Exhibit 3: Top 10 Shareholders

Source: Analysis by Kalkine Group

Key Risks

The company is exposed to the risk of a deep or prolonged economic downturn that could affect demand for the group’s products and financial prospects. It is also susceptible to the risk of declines in the price of steel, or any significant and sustained increase in the price of raw materials and no corresponding increase in steel price. Additionally, fluctuation in foreign exchange rates mainly the Australian dollar relative to the US dollar, and higher competition are some other potential risks.

Outlook

The company guided achieving underlying EBIT between $2.1 billion to $2.3 billion in H1FY22 with the business benefitting from robust demand, global steel prices, and spreads across key geographies, with favourable conditions in building and construction end use segments.

Besides, the balance sheet position remained strong with net cash of $798 million. Its balance sheet strength and cash flows will aid the company in fast tacking its strategic growth plans that include targeted investment for the long-term growth and resilience of the group, as well as placing the business for a low carbon future, with the near-term action underpinned by the 5-year climate investment program of up to $150 Mn.

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Stock Recommendation

The stock has been valued using an EV/Sales multiple based relative valuation (on an illustrative basis) and the target price so arrived reflects a rise of low double-digit (in % terms). A slight premium has been applied to peer average EV/Sales multiple (NTM basis) considering its healthy performance in FY21, improved earnings guidance, robust demand environment, and decent liquidity position.

Considering the aforementioned factors along with its decent outlook, we give a “Buy” recommendation on the stock at the current market price of A$18.99 per share (Time: 10:54 AM (GMT +10), Sydney, Australia) on 2nd February 2022.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.