Company Overview: BlueScope Steel Limited is a steel manufacturing company. The Company offers metal coated and painted steel building products, and is also a supplier of engineered building solutions (EBS) to industrial and commercial markets. The Company's segments include Australian Steel Products, which produces and markets a range of coated and painted flat steel products, as well as various commodity flat steel products; New Zealand & Pacific Steel, which includes the New Zealand Steel, Pacific Steel, New Zealand Minerals and BlueScope Pacific Islands business areas; BlueScope Buildings, which provides EBS and includes its metal coating, painting and Lysaght operations in China; Building Products ASEAN, North America & India, which is involved in metallic coating, painting and steel building product operations, among others, and Hot Rolled Products North America, which includes North Star BlueScope Steel, a single site electric arc furnace producer of hot rolled coil.


BSL Details

Strong First Half Results; On-Market Share Buy-Back to Continue: BlueScope Steel Limited (ASX: BSL) is a global leader in premium branded coated and painted steel products. On April 3, 2019, the market capitalisation of BlueScope Steel stood at ~$7.8 billion. The company had released its 1H FY19 results in which it posted $624.3 million of net profit after tax which reflects a rise of 42% on the YoY basis. The company’s underlying NPAT amounted to $613.5 million. The company’s top management had reflected favourable views with regards to 1H FY 2019 results and stated that BSL was able to maintain robust performance from FY2018 with a strong 1H result. The company’s underlying EBIT for 1H FY 2019 amounted to $849.6 million reflecting 62% improvement as compared to the same period in FY2018. The strong results for 1H FY 2019 was helped by robust demand and steel spreads in the company’s U.S. and Australasian markets. The company’s sales revenue amounted to $6,398.1 million, which implies 17% higher than 1HFY18. It was mainly driven by the higher steel prices across all the segments and the favourable translation impacts from a weaker Australian dollar exchange rate (A$:US$) incurred during the same period.

The on-market share buy-back of BSL of up to $250 million which was announced in December 2018 would continue, and the company had approved a payment of interim dividend amounting to 6.0 cents per share. The recent efforts to boost the productivity and competitiveness in Australasia, coupled with the acquisition of North Star will support to generate robust cash earnings and strong returns in years to come.

Moving forward, we expect that BSL would be supported by its strong cash-generation and revenue generating capabilities coupled with the decent liquidity position. The company’s robust free cash flow in the last three years had supported it in delivering returns to the shareholders while simultaneously reducing the debt. We expect that geographic diversity with respect to earnings together with increasing contribution from the value-added products might support the company moving forward.
 

1H FY19 Financial Headlines and Capital Management (Source: Company Reports)

Decent Footing in Margins: BlueScope Limited is having decent footing with respect to its key margins as its net margin stood at 10% at the end of 1H FY 2019 which implies the YoY rise of 2% highlighting the company’s improved capability to convert its top line into bottom line. Also, the company’s EBITDA margin, during the same period, was 15.5% which implies 3.8% YoY improvement. The company is also having decent liquidity position as its current ratio stood at 1.89x which reflects 4.2% YoY improvement reflects that the company’s position to meet its short-term obligations have improved. Also, BSL’s liquidity position provides it with headroom to achieve growth moving forward.

Buy-Back Update: The company has updated the market about the progress on several transactions under its ongoing buy-back event. The company intends to deploy around A$250 million in value towards the buy-back program. As of now, the group has bought back a total of 7,504,561 shares via on-market trade for the total consideration of A$9,58,03,976.98. Thus, the remaining consideration which is left to be paid for the shares under buy-back is $154,196,023.02.However, in the recent past, the company announced cancellation of buy-back of 3,465,000 shares at a consideration of $4,74,76,979.50. 

Understanding BSL’s North Star Business: The North Star business posted sales revenue amounting to $1,265.0 million which implies the rise of 47% on the YoY basis. The underlying EBIT of the business amounted to $411.6 million, displaying a substantial rise of 183% on PCP basis. It was mainly because of higher steel spread coupled with favourable foreign exchange translation rate impacts due to weaker A$:US$ exchange rate. On the macro front, the strong US economy had aided robust demand from North Star’s end market segments. Also, the US steel industry happens to be healthy, with favourable regulatory and trade environment, robust demand as well as stability in the raw material prices jointly providing robust spread environment.
 

1H FY 2019 Underlying EBIT and Total Despatches of North Star (Source: Company Reports)

Sales revenue of ASP Business Rose 12% YoY: The sales revenues of Australian Steel Products (or ASP) amounted to $2,869.9 million in 1H FY 2019, implying 12% YoY improvement mainly because of increased domestic and export prices because of higher global steel prices together with favourable impact of weaker A$:US$ exchange rate and increased revenue from export coke sales. The underlying ROIC (or Return on Invested Capital) of ASP business witnessed a rise to 24.6% in 1H FY 2019 from 22.7% in 1H FY 2018 on the back of stronger EBIT which offsets the higher net operating assets. Broadly, the domestic building sector direct sales volumes were robust in 1H FY 2019 even though there were down slightly as compared to 1H FY 2018.
 

1H FY 2019 ASP Business’ Key Metrics (Source: Company Reports)

Analysing Building Products Asia and North America Segment: In 1H FY 2019, Building Products Asia and North America business posted underlying EBIT amounting to $79 million which implies the fall of 27% on the YoY basis. With respect to ASEAN, the margins were lower on the back of higher steel feed costs and weaker despatch volumes. However, the company stated that businesses are ‘getting fit’ with the help of cost reduction and manufacturing improvement program targeting $20 million improvements in FY2019 and full year run rate of $40 million by FY 2020.


1H FY 2019 Underlying EBIT and Total Despatches (Source: Company Reports)

New Zealand and Pacific Steel Segment’s Sales Revenue Rose 20% YoY: The sales revenue of New Zealand and Pacific Steel stood at $463.5 million which implies a YoY rise of 20% mainly because of increased domestic and export steel prices, higher vanadium slag revenues and a favourable influence of foreign exchange translation. From the macro front, the economy of New Zealand remains strong and S&P Global Ratings had revised their rating upwards i.e. from “Stable” to “Positive” because tailwinds from lower unemployment, robust growth in wages, and weaker New Zealand dollar have been facilitating sound levels of growth.


Underlying EBIT and Domestic Despatches (Source: Company Reports)

A Look at Buildings North America Segment: In 1H FY 2019, Buildings North America segment generated sales revenue amounting to $587.4 million which implies a rise of 12% on YoY basis primarily because of favourable impact of foreign exchange rate translation as a result of weaker A$:US$ exchange rate and higher despatch volumes. The segment’s underlying EBIT stood at $22.1 million in 1H FY 2019 which reflects the fall of 16% on YoY basis mainly because of lesser margins given longer customer lead times.


Key Metrics of Buildings North America Segment (Source: Company Reports)

Understanding Key Growth Drivers of BSL: BlueScope Steel is having a disciplined approach to growth and they would be investing to maximise value from “Best in Class” assets, to achieve growth in premium branded products and it would also invest in customer, technology and innovation. We expect that its disciplined approach towards growth would aid the overall growth of the company and might place it in a stronger position to achieve long-term growth prospects.

The company had stated that the Australian Steel Products segment might witness a softer result in 2H FY 2019 because of lower spreads, a moderate softening in domestic volume and reduced coke margins and coke volume. However, these are expected to be offset partly by favourable influence of pricing lags and increased export volumes and benefit from actual costs of raw materials in inventory.

Coming to Building Products Asia & North America segment, overall, there are expectations of similar results in 2H FY 2019 as in 1H FY 2019. With respect to ASEAN, there is a target of $20 million benefits from the cost reduction and manufacturing improvement program. Also, there are expectations of some improvement in volume and margins. In 2H FY 2019, there are expectations of stronger results in Buildings North America segment on the back of higher volumes and margins.

Stock Recommendation: Over the past three months, the stock of BlueScope Steel posted 35.67% return while, in the span of previous one month, it posted 5.22% return which can be considered at decent returns over the said period. Moreover, the company is possessing robust cash-generation capabilities which might support the company in strengthening its cash liquidity position, thereby, further improving its positioning to make investments towards strategic business objectives.

From the valuations perspective, the stock seems to be pretty much attractive as its P/B ratio stands at 1.2x as compared to the industry average (Metals & Mining) of 4.5x reflecting that the company is undervalued, thus, providing a decent entry level at the current juncture. Also, the company’s top line has witnessed a CAGR of 9.82% over the span of past five years to FY 2018 (FY 2014- FY 2018) which highlights the company’s sustainable revenue generating capabilities and which can attract the attention of market players. Additionally, the group has recorded Bottom-line substantial growth at CAGR of 126.0 percent over the four years (FY15-FY18). Hence, considering the aforesaid facts and business outlook, we recommend a “Buy” rating on the stock at the current market price of A$14.820 per share (up 0.679% on April 03, 2019).
 

BSL Daily Chart (Source: Thomson Reuters)

 
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