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Stock of the Day - Bluescope Steel (BUY)

Today’s report focuses on BlueScope Steel Limited (BSL) which witnessed sales of A$8.01 billion for FY14 representing an increase of 9.8% from that of FY13. BSL also reported for a $246 million lift in operating cash flow and strong balance sheet with 5.5% gearing as at 30 June 2014. The Company recently announced that its Coated & Industrial Products Australia (CIPA) and Building Components & Distribution Australia (BCDA) businesses will be combined into a single segment called Australian Steel Products. The Australian building solutions businesses have been transferred from Global Building Solutions to the Australian Steel Products reporting segment. The Company aims to provide detailed disclosure for the new Australian segment for clarifying the understanding on business earnings drivers. BSL also declared that its turnaround and growth initiatives have set a solid base for a future return to paying dividends.


Underlying Earnings (Source – Company Reports)

The Company lately reported sound progress on BSL’s efforts including the launch of ZINCALUME® steel with patented Activate™ technology in Australia, followed by significant updates to BSL’s COLORBOND® steel product; expansion of New Zealand iron sands export operations; delivery of new products through the JV with Nippon Steel Sumitomo Metal Corporation; restructuring initiatives undertaken in China Buildings; and so forth. In recent times, it is noted that A$/t steel spreads have been robust despite the waning steel prices. Further, an increase to FY15E NPAT is expected even after taking into account the lower iron sands EBIT. The stronger steel spreads may prove to be beneficial to 1HFY15 NPAT. Assuming that 70% of BSL Australian steel volumes emanate from East Asia prices and 30% from the US, the hybrid blast furnace spreads for 1HFY15 have risen 12% hoh and 27% yoy to A$351/t. For the Electric Arc Furnace steel spreads, the 1HFY15 spreads are believed to have risen A$14/t hoh to A$400/t.

BSL has reconfirmed the 1HFY15 NPAT guidance to be similar to that of 2HFY14 of $63m. The Company has provided more detail on EBIT while stating that the improvement in 1H15 should be about 30% on 2H14. Overall, the operational performance has bettered from August 2014 results. BSL also believes that Australia’s higher spreads will be positive though slightly equipoised by factors including lower HRC prices, the Port Kembla fire and weaker demand outside building and construction.


CIPA_HRC Price and Spread (Source – Company Reports)

BSL NZ is expected to witness strong steel volumes although affected by weaker steel prices. Lower iron ore prices will tend to affect iron sands. North American seasonality and a healthy market demand may lead to a better 1HFY15 EBIT in comparison to 2HFY14 for building products. Other updates include softness in Thailand with Vietnam and Malaysia flat hoh which are expected to increase in 2HFY15; and global building solutions witnessing strong growth in North American order books. The conditions in China are turbulent although cost reductions are expected to benefit from 2HFY15. North Star witnessed a stronger spread driven Sep 2014 quarter with a little softness in the December 2014 quarter. The spread is nonetheless believed to remain elevated and favorable in the near future.



Debt Facilities Maturity Profile at 30 June 2014 (Source – Company Reports)

We note that volume and spread benefits across the domestic manufacturing and North America businesses will drive growth. Under CIPA, 2H15 earnings growth may be driven by aspects such as only one (and not two) production stoppage of the Port Kembla blast furnace to replace staves implying a cost of only $5m in 2H15 as opposed to $10m in 1H15; and assumed non-recurrence of the sinter plant fire. Strong growth in CIPA’s earnings over the next 12-18 months is also expected owing to the residential building approvals which have recoiled 11% to an annualised rate of 205k through October 2014. For the BCDA division, further benefits from the integration of acquisitions and restructure of Solutions Australia will help deliver earnings in 2H15. The Building Products business (JV with Nippon Steel) is expected to witness positive momentum through to 2H15 given the planned improvement for the Indonesia business and increased activity or recovery being sensed in the project market in Thailand.




Recent Initiatives to Boost Future Earnings (Source – Company Reports)

However, softness in iron sands revenue for NZ Steel along with turbulence in China custom engineered buildings business would be growth barriers to some extent. Overall, the risks to be considered entail fluctuations in AUD, softness in steel prices, slower recovery of the Australian housing market and integration risks associated with recent acquisitions. In a way, outlook for the US remains promising with encouraging momentum in Asia and Australia but negative for NZ.


BSL Daily Chart (Source - Thomson Reuters)

Based on the above, we reiterate a BUY recommendation for this stock at the current price of $5.26.