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.