BlueScope Steel Limited profit surges

• Higher volumes drove revenues: BlueScope Steel Limited(ASX:BSL) reported a revenue increase of 8% yoy to $8,520.7 million for the fiscal year of 2015, driven by better export volumes in Australian Steel Products as well as improved volumes from Buildings in North America. The recently acquired Fielders, Orrcon and Pacific Steel businesses also contributed to the enhanced revenues. However, the higher revenues were partly offset by the decrease in dispatch volumes from China and Thailand, as well as falling sales prices and export volumes at New Zealand steel and iron sands operations. On the other hand, BSL’s NPAT surged to $136.3 million during the fiscal year, as FY15 had no impairment charges. Decrease in restructure and redundancy costs coupled with better underlying NPAT also contributed to the reported NPAT growth. The group’s Underlying EBIT for FY15 improved by $37.7 million to $301.8 million as compared to last fiscal year, while underlying EBIT improved to  $130.8 million for the second half of the fiscal year of 2015 against $113.3 million (before restatement for reclassification of discontinued operations) and from $120.4M (restated basis) in second half of FY14. The ASP underlying EBIT increased by $102.8 million to $150.3 million in FY15 against pcp, boosted by better spread. On the balance sheet front, BSL has a net debt of $275.2 million as at June 2015, and a gearing of 5.5%. The group declared a fully franked final dividend of 3.0 cents per share for FY15.

 

• Solid performance by Global Building Solutions and Building Products: BlueScope’s New Zealand and Pacific Steel underlying EBIT reduced $107.9 million to a loss of $33.2 million in FY15 as compared to pcp, severely impacted by the falling iron sand and steel prices and decrease in iron sand dispatch and volumes. However, better steel product mix coupled with Pacific Steel acquisition contribution offset the EBIT loss to a certain extent. On the other hand, the group’s Building Products segment’s underlying EBIT surged $9.4 million to $98.3 million in FY15 from pcp, driven by enhanced margins at Indonesia as well as enhanced performance from Indian joint venture. However declining volumes and margins at BCSL’s Thailand and Malaysia, North American businesses added some pressure to EBIT. Meanwhile, strong volumes for Buildings North America as well as decrease of pension fund obligations by $11 million, contributed to the group’s Global Building Solutions underlying EBIT, which rose by $16.8 million to $43.7 million in FY15. China coating and painting operations showed a stable performance during the year, but Asian engineered buildings business witnessed pressure during the period. Meanwhile, the Hot Rolled Products for North America delivered a $2.7 million increase of underlying EBIT to $107.3 million for FY15, boosted by better volumes.

 
 
        

       Underlying EBIT and volume performance for Buildings North America segment (Source: Company Reports)
 

• Focusing on cost efficiency and product mix: BlueScope Steel continues to focus on premium branded steel businesses through its channels to market. For Australia steelmaking business, BSL estimates to generate a permanent annual cost savings of around $200 million by fiscal year of 2017. BlueScope is also exploring the feasibility of making steel at Australia and New Zealand and compare it with the present business model. BlueScope is also studying the current operation of its Taharoa iron sands business to enhance productivity and decrease iron ore price with breaking even.

       


        Target market opportunity (Source: Company Reports)

• Outlook: BlueScope Steel estimates its first half of FY16 underlying EBIT to be in line with second half of FY15, given the average Spot East Asian HRC price of ~US$325/t ,  62% Fe CFR iron ore price of ~US$50/t , Hard coking coal price of ~US$90/t and  AUD:USD at US$0.73. The group estimates its underlying net finance costs and underlying tax charge to be in line with second half of FY15, while profit attributable to non-controlling interests to be more than 2H15. Meanwhile, BlueScope estimates to benefit from the ongoing demand for residential volumes and cost improvements. The weaker Australian dollar is estimated to mostly cover the declining steel and iron ore prices and spreads.

 

• Stock Performance: The shares of BlueScope Steel have delivered a negative returns of 25.9% till date owed to the falling commodity prices. However, the stock recovered over 29.6% in just last three months, driven by falling Australian dollar, improved performance and the group’s cost cutting initiatives to sustain the business. Further recovery in steel and other commodities can also add support to the stock further. We believe the stock is trading at an attractive levels given its cheaper valuation, and accordingly recommend a “BUY” on the stock at the current price of $4.38.

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