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Stock Of The Day - Bluescope Steel (BUY)

For the first half of FY 2015, the improvement in Indonesia was partly offset by weaker results from North America, Thailand, Vietnam and Malaysia. The retail sector in Thailand was strong but the project market continues to be weak following the prolonged political instability. Indonesia remains a very competitive market and the company is focusing on improvements in channels and pricing. North America is showing seasonal strength with improvements in underlying volumes. In the second half of FY 2015, the company expects the continuation of recent falling steel prices resulting in pressures on margins in North America and some impact on volumes. The commissioning of the new low cost in line expansion in metal coating is expected by the end of the fiscal and SuperDyma® commissioning continues to be on track for commissioning in the first half of FY 2016 and commencement of product sales in the second half of FY 2016.


History Of Bluescope in Thailand (Source - Company Reports)

Thailand is a key growth market in Southeast Asia because it is Southeast Asia’s second largest economy after Indonesia with population size of around 69 million. GDP is expected to continue to grow at 3-4% for future outlook period; Key drivers are: Industrial and services sector account for over 90% of GDP, Fixed investment & infrastructure to stimulate growth, FDI growth in manufacturing; and  Growing tourism. The country has one of ASEAN’s highest GDP per capita levels demonstrating a well developed and affluent consumer market.


 
The company is Australia’s largest direct investor in Thailand and manufactures innovative steel building solutions for the Thai building and construction industry and has recently diversified into home appliance segment (2015 onwards). It has had in country manufacturing capability since 1988 with more than 800 employees and three manufacturing facilities including  BlueScope Lysaght facilities in Rangsit (near Bangkok) and Khon Kaen (northeast Thailand) and  BlueScope Steel Thailand cold mill (350ktpa), metallic coating (350ktpa) and painting (90ktpa) facilities at Map Ta Phut (200km south of Bangkok). The EBIT performance has been consistent with favourable trends despite constraints on capacity and the growth initiatives include in-line painting and new products and product mix.


Key Product Applications (Source - Company Reports) 

BlueScope Lysaght Thailand has been successful at winning mega-projects. Government Mega-projects like the MRT are approximately 10% to 15% of Lysaght's revenue. Industrial and Commercial are 25% to 30%. The balance is Smart Truss and smaller Randbuild projects. The US$20bn MRT project is an ambitious 10-year scheduled construction of a city rail system where Colorbond has been specified for roofing of the stations, vast terminals and workshops. Lysaght is the roll former of all the roofing, both aluminium which is purchased externally, and steel, and the installer of much of it. Lysaght subcontracts all of the installation work to a network of supported, trained subcontractors. Where other installers have been successful tenderers for other portions of the project, they are also using Lysaght purchased roll formed product.

NS BlueScope Malaysia, Singapore and Brunei

The operations in these countries consist of  NS BlueScope Malaysia coating and painting facility in Kapar and six Lysaght sites: four in Malaysia, one in Singapore and one in Brunei. The macroeconomic environment continues to be solid with construction market growth as indicated below:



 Construction Activity (Source - Company Reports)

The strategic focus in the project area includes improved product mix and market penetration, and improvements in profitability. The important initiatives include developing loyal customers, converting painted galvanised and tiles, and refreshing and enhancing products. The focus in the retail segment includes expanding channels geographically, developing loyal dealers and channels and brand awareness and initiatives include brand and loyalty programs and developing the ZACS line of products. Downstream focus includes enhancing market position and expanding coverage in Borneo.
 

Leading Brands (Source - Company Reports)

Total sales volume has remained strong though a limiting factor has been the continuous paint line capacity and this constraint is being addressed by a in-line painting. The earlier trend of moderation in sales is now showing signs of reversal.EBIT performance is consistent with favourable trends and will be enhanced by new initiatives.
 
 
Extensive restructuring of the Asian businesses to a matrix organisation has materially lowered the break even capacity utilisation compared to historic. Now local businesses focus on manufacturing and marketing, not on supply. Best priced input supply is critical. The Asian market remains intensely competitive and requires a relentless cost focus and lowest cost steel purchasing to remain competitive. The strategy remains to increasingly convert from “fit for purpose” products to differentiated premium branded products. The business is not a producer of commodity steel.
 
 
 BSL Daily Chart (Source - Thomson Reuters)
 
We believe that the company has done a great job in turning around and stabilising a business that was in trouble and the achievements include a lower level of gearing and focus on the core operations to improve profitability. We expect earnings to grow by up to 20% in the second half of FY 2015 because of the growth in business and the continuing weakness of the AUD. The stock is quoting considerably below its 52 week high of $ 6.3 and we think that the current price represents an excellent window of opportunity for buying. We put a BUY recommendation on the stock at the current price of $3.54.