BlueScope Steel Limited

Strong results with an outstanding performance by North Star: BlueScope Steel Limited (ASX: BSL) is the largest global producer of metal coated and painted steel building products globally. It principally focuses on the Asia-Pacific region. The company posted its robust results for the first half ended 31 December 2018 wherein reported EBIT grew by 65% and amounting to $849.6 Mn. Reported Net Profit after Tax for the period totalled to $624.3 million, up ~$183 million on 1H FY18. Looking at the half-yearly performance segment-wise, the North Star segment contributed most to the strong results during the period with an underlying EBIT of $411.6 million, up 183% on the prior corresponding period. The growth in EBIT was backed by the continued strength in Midwest benchmark steel prices during the period accompanied by strong demand and favourable trade environment. This segment continued to operate at 100% capacity during the period and is further pursuing capacity growth and expansion opportunities.
 
Performance of the North Star was followed by Australian Steel Products with an underlying EBIT of $319 million, up 22% on 1H FY18. EBIT from Building Products Asia and North America amounted to $78.8 million, down 27% on pcp, however, overall market conditions remain positive in North America China, India, and South East Asia. New Zealand and Pacific Steel reported a strong performance with an EBIT of $71.9 million, up 75% on pcp, supported by high domestic demand and higher selling prices on the back of stronger global steel prices. Buildings North America reported an underlying EBIT of $22.1 million, down 16% of 1H FY18 with strong end-market demand accompanied by marginally lower despatch volumes.


Segment-wise underlying EBIT (Source: Company Reports)
 
The company is primarily focused on ROIC and EPS growth to drive shareholder returns. It had announced an On-market buy-back of up to $250 million in December 2018 with $43 million purchased in 1H FY19 and the remaining to be purchased in 2H FY19. As of now, the group has bought back a total of 1,65,47,926 shares via on-market trade for the total consideration of A$ 21,30,35,300.10 and intends to buy back remaining shares with an aggregate consideration of A$36,964,699.90 out of A$250 Mn.
 

Shareholder distribution (Source: Company Reports)
 
BlueScope’s growth prospects are largely driven by Systems modernisation, continued investment in building design and engineering systems, YKGI Malaysia assets acquisition, Painting and coating capacity in Thailand and Investment in ZINCALUME steel technology across ASEAN and China.
 
Outlook: As per the segment guidance, North Star and Australian Steel Products are expected to deliver softer results as compared to 1H FY18. While North Star’s performance will be driven by average benchmark spread, Australian Steel Products will see lower spreads accompanied by reduced coke margins and volume and moderate softening in domestic volume shaping its performance during 2H FY19. Building Products Asia & North America are expected to deliver an overall similar result to 1H FY19. Buildings North America is also poised to deliver stronger results during 2H FY19 on the back of high volumes and margins. However, New Zealand & Pacific Steel segment is expecting a lower result during the period, largely due to lower benchmark selling prices, smaller net contribution from product sales, and high costs.
 
Overall, the company expects the 2H FY19 to be softer in comparison to 1H FY19. During the period, it is expecting a higher profit attributable to non-controlling interest as compared to the first half of the year.
 
Stock Recommendation: On the stock performance front, the company yielded returns of -20.67% and -24.30% over a period of 1 month and 3 months, respectively. Currently, the stock is trading close to its 52-week low prices of $10.305 with reasonable PE multiple of 3.33x, proffering a decent opportunity for accumulation. Fundamentally, the company is rapidly growing in terms of profitability and operations and is poised to showcase decent performance in the near future. With a strategy to focus primarily on ROIC and EPS growth to increase the shareholders’ return, BlueScope is working towards all the segments to grow the business. Hence, we give a “Buy” recommendation on the stock at the current market price of $10.680 (up 0.85% on 5 June 2019).

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