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

Growth Strategy

BSL is focused towards its strategic priorities, which are aimed at transformation as well as expanding its portfolio. Additionally, it is focusing towards safety and delivering robust returns. The company’s strategy focuses on enhancing the customer experience and business performance through digital technology which will aid in customer and productivity improvements.

Further, the strategy emphasises on growing its portfolio of sustainable steelmaking and coating, painting, and steel products businesses. This will be achieved by way of expanding its US business including expansion of North Star as well as driving growth in the fast-growing Asian region.

Financial Framework Providing Strength

The company’s financial framework deeply concentrates on driving financial performance and disciplined allocation of capital. It is aiming at generating returns (ROIC) above cost of capital (WACC on average) through the cycle and maximise free cash flow generation. Additionally, it holds a solid balance sheet with sufficient liquidity that provides the base in attaining long term sustainable earnings and growth. Notably, BSL continues to target net debt of around $400 million in the long-term.

The company has identified future investment priorities with projects worth around ~$1.9 billion over five years that are aimed at growth opportunities, foundational investment and to place the business for a low carbon future.

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. The acquisition provides the company with immediate and direct access to the large and growing Eastern US region.

Key Metrics

The company’s gross margin and ROE grew sharply in FY21 over FY20. Further, the current ratio steadily improved to 1.87x in FY21 from 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 ~20.58% 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.

Outlook

BSL announced that it is now expecting underlying EBIT for H2 FY 2022 of between $1.375 billion to $1.475 billion. The robust outlook is because of improved earnings expectations for North Star as well as the North America coated business due to better than anticipated realised steel prices and spreads in the US.

Considering the ongoing strength in the raw material prices and continued supply chain disruptions, BSL is expecting net working capital employed to remain higher during the current half.

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

Technical Overview

Daily Price 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 improved earnings guidance for H2FY22, decent outlook, 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$18.71 per share, up by 0.591% on 8^th June 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