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.
• The board declared an interim dividend of 25.0 cents per share for H1FY22.

Exhibit 1: Performance Trend

Source: Analysis by Kalkine Group

Deepens Presence in Eastern US Through Acquisition

In a major stride towards its growth plans for North America, the company recently has agreed to acquire the Coil Coatings business, the second largest metal painter in the US from Cornerstone Building Brands, Inc for a consideration of US$500 million. Coil Coatings caters to the requirements of the commercial and industrial construction applications through its overall capacity of around 900,000 tonnes per annum across seven facilities.

The acquisition of Coil Coatings provides the company with long term opportunity as it almost triples its US metallic coating and painting capacity to over 1.3 million metric tonnes per annum, from around 475,000 tonnes per annum currently. The acquisition also provides the company with immediate and direct access to the large and growing Eastern US region.

The company will finance the acquisition entirely through cash on the balance sheet and it will be instantly accretive to earnings per share. The company expects the transaction to complete in calendar year 2022.

Considerable Opportunity for BSL

Notably, total US painted demand is ~4.5 Mn metric tonnes, having grown at 2% p.a. since 2015, and is expected to continue to grow at this rate to 2030.

Building and construction accounts for two-thirds of current Eastern US demand and is likely to grow by around 20% to 2030. This provides significant opportunity for the company with Coil Coatings business situated in key building and construction end-use demand regions.

Future Investment Priorities

The company has 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.

Key Metrics

The company’s gross margin and ROE grew sharply in FY21 over FY20. 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 ~20.70% of the total shareholding while the top four constitute the maximum holding.

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. The company expects similar underlying net finance costs, lower underlying tax rate and lower profit attributable to non-controlling interests relative to H1FY22. Moreover, BSL forecasts a significantly better performance of its Buildings North America business and New Zealand and Pacific Islands in H2FY22 compared to H1FY22.

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 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 closing market price of A$19.30 per share, down by 1.58% on 4th May 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