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 H1FY22 (For the Six Months Ended 31 December 2021)

• The company has recorded 62% YoY growth in sales revenue due to higher global steel prices as well as strong demand across the portfolio.
• Underlying EBIT increased significantly to $2,204.1 million, up 315% from H1FY21, driven by stronger steel spreads primarily on account of higher global steel prices and improved volumes from stronger demand.
• Resultantly, underlying NPAT grew sharply by 373% to $1,573.4 million and the reported NPAT increased 398% to $1,643.5 million.
• Underlying return on invested capital in the 12 months ending 31 December 2021 increased to 43.7% compared to the 12 months to 31 December 2020, mainly driven by stronger earnings, and was partially offset by higher net operating assets.
• The board declared an interim dividend of 25.0 cents per share for H1FY22.

Exhibit 1: Performance Trend

Source: Analysis by Kalkine Group

Future Investment Priorities

The company has a strong focus on driving financial performance as well as disciplined allocation of capital. It has outlined future investment priorities with an indicative ~$1.9 billion of projects identified over five years that are aimed at growth opportunities, foundational investment and to place the business for a low-carbon future. The projects include incremental debottlenecking opportunity at North Star, exploring additional upgrades in manufacturing capacity at Australian metal coating, exploring the setting of painting capacity in the Eastern US, among others.

Robust Capital Structure

BSL’s balance sheet remains strong with $695.9 million of net cash on 31 December 2021. The financial liquidity amounted to $3,371.2 million on 31 December 2021, comprising $609.6 million in NS BlueScope Coated Products joint venture. This, coupled with strong cash flow, provides the company the confidence to invest for the long-term growth and resilience of the Group.

Increase in Buy-back Program

Following the approval of the on-market buy-back of up to $500 million in August 2021, $285 million of stock has been bought since August 2021. The company will further follow the practice of using the on-market share buy-backs to supplement the payment of consistent dividends. The board has permitted to increase the scale of the buy-back program to allow up to an additional $700 million to be bought over the next 12 months. However, the timing and value of stock purchased will be subject to the prevailing market conditions, share price and other factors.

Strengthens Position in US Through Acquisition

The company, on 17 December 2021, has completed the acquisition of the ferrous scrap steel recycling business of MetalX LLC. This acquired business will further add to BSL’s extensive US asset footprint of over $3.0 billion and will operate under the name, BlueScope Recycling and Materials. The company has earlier 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 business. The acquisition fulfills its return on capital expectations and provides synergies to optimise logistics and lower scrap costs.

Key Metrics

The company’s gross margin and ROE grew sharply in FY21 over FY20 to 28.6% and 16.7% from 23.0% and 1.5% in FY20, respectively. Further, the current ratio improved to 1.87x in FY21 from 1.58x in FY17. However, the company’s cash conversion cycle has increased to 64.0 days in FY21 from 54.5 days 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 ~17.12% 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 5.15% 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 decline 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 has guided to achieve underlying EBIT between $1.20 billion to $1.35 billion in H2FY22. Moreover, BSL forecasts a significantly better performance of its buildings North America business and New Zealand and Pacific Islands in H2FY22 compared to H1FY22. However, the company expects a lower result at its Australian Steel Products, and North Star business and Building Products Asia & North America businesses in H2FY22 compared to H1FY22.

BSL is better placed for a low-carbon future that would enable the company to sustain delivering strong returns to shareholders. Further, it has maintained investment grade credit ratings. BSL’s short to medium term target is to retain balance sheet capacity to finance investment for growth and major projects, while the company continues to aim for around $400 million net debt in the long-term.

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

Technical Overview

Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (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 record financial results in H1FY22, high quality asset portfolio, and healthy liquidity position.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Considering the aforementioned factors, we give a “Buy” recommendation on the stock at the current market price of A$18.760 per share (Time: 11:44 AM (GMT +10), Sydney, Australia) on 9th March 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.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

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.