Australia | Nov 25 2019
Brokers are relieved BlueScope Steel reiterated first half guidance at its AGM and signalled there were no heightened areas of risk heading into the second half.
-Demand appears relatively stable in major markets
-Steel spreads better than many feared, and improving
-Macro uncertainties remain a risk but outside the company's control
By Eva Brocklehurst
BlueScope Steel ((BSL)) appears to be negotiating a turbulent global market relatively smoothly, with small areas of weakness being offset by a strong performance more broadly. The company has reiterated first half guidance for underlying earnings (EBIT) of around $275m, which still implies a -45% decline vs the second half of FY19.
The main earnings drivers are readily visible, Credit Suisse points out, and there were no heightened areas of risk heading into the second half, rather the company moderated volume concerns as demand appears relatively stable in major markets.
The Australian business is in line with most expectations. Domestic volumes are slightly better than previously expected, supported by the building segment and distribution channel.
That said, Australian detached housing activity has been compressing, UBS points out, and peers have noted soft trading conditions, so it appears that the company's Colorbond product is taking share. Despite this positive aspect, UBS is cautious, as lower volumes in Australia could lead to increased low-margin exports.
BlueScope Steel is also experiencing better pricing and costs at the US North Star operation, which has been operating at full capacity. The company's US$700m, 850,000t expansion of North Star is progressing on schedule with all permits received and contracts with major equipment manufacturers signed.
UBS believes that improved realised prices signal competence in the company's timing and execution and the potential upside at North Star, as a result, is likely to offset the drag from other divisions.
Citi assumes the expansion project will reach full utilisation by FY24 and contribute earnings of around $140m on a long-term spread (the difference between the raw buying price and the finished selling price) assumption of US$300/t.
Credit Suisse suspects the second half will start from a position of weak, albeit improving, steel spreads in Australia and "reasonable" spreads in the US. For the former, the low point in spreads should coincide with seasonally softer volumes in January that may limit the earnings impact, while recent increases in hot rolled coil prices and moderating raw material prices indicate an improvement thereafter.
UBS cuts second half estimates for earnings by -6% and assumes an Asian spread of US$220/t and a North Star spread of US$260/t, both in line with spot or current spreads. Essentially, any suspected weakness in the outlook has been shifted to the second half. UBS recently downgraded BlueScope Steel to Sell, citing weak US steel demand and weakness in Australian housing.
The broker acknowledges Australian steel products appear to be doing a little better but, given spreads are close to long-term averages, considers the stock expensive relative to US peers.
In contrast, Credit Suisse believes the stock is cheap versus the medium-term opportunity, and is pricing in Australian steel product business at below mid-cycle, which remains its largest contributor to earnings and cash.
In the US, conditions for the North American building industry appear reasonable to Credit Suisse, buoyed by ongoing strength in demand, while macro headwinds are outside of the company's control.
Macquarie agrees macro uncertainties remain a risk, given soft global demand indicators, but asserts building conditions in North America appear worse and that has led to a softer outcome in the engineered building solutions business. Manufacturing challenges at a single location have generated higher costs and lead times are extended, although the broker concedes demand and order intake are solid.
Meanwhile, China continues to perform strongly, amid robust demand and margins, and India is also performing well, as higher margins offset lower volumes. This is countered by weak macro economic conditions in Thailand and Malaysia, which are pressuring margins and volumes.
Robust demand in residential construction in the Pacific has been countered by softening in the infrastructure segment. NZ Steel expects a soft first half, similar to the prior half, because of lower vanadium prices and higher production costs.
FNArena's database has two Buy ratings, three Hold and one Sell. The consensus target is $14.20, signalling -0.4% downside to the last share price. Targets range from $12.40 (UBS) to $15.30 (Credit Suisse).
See also, BlueScope's North Star Expansion Compelling on August 20, 2019.
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