Demand Running In BlueScope’s Favour

Australia | Oct 26 2020

Concerns surrounding disruptions to BlueScope Steel's business are ebbing, encouraged by first half earnings guidance that is well ahead of prior forecasts.

-Demand for housing/renovations underpins Australian activity
-Yet could this be simply a pulling forward of future demand
-North Star could push the US market into oversupply


By Eva Brocklehurst

Demand is running in BlueScope Steel's ((BSL)) favour, despite lingering concerns regarding disruptions stemming from the pandemic. The robust outlook is particularly the case for Australian construction, although Southeast Asia and India have improved notably.

First half earnings guidance is $340m, well ahead of prior broker forecasts and an increase of 30% on the prior half. Robust volumes were recorded across the business in the first quarter and East Asian steel prices are also improving.

In the US, where the automotive industry is recovering, North Star continues to dispatch at full capacity. Macquarie finds a number of supportive aspects in the company's update, including Australian construction, US automotive volumes and stronger realised spreads (the difference between the raw material and finished product price).

Ord Minnett calculates a free cash flow yield of 4% in FY21, rising to 7% in FY22, and now expects Australian Steel Products (ASP) to generate $192m in earnings (EBIT) because of higher coke profit and volume growth as well as slightly better prices. A minor improvement in New Zealand is expected.

The stronger cash flow should facilitate capital management too, with Morgan Stanley now forecasting a FY21 free cash flow yield of 14%. A reactivation of the buyback is expected from the second half of FY21.

As always, Morgan Stanley believes spreads will be the main driver of earnings and these are well likely to deliver an even stronger second half, although the current share price is assessed to be capturing the improvement.

Citi now assumes Australian domestic dispatches are flat in FY21. Government stimulus appears to be working well for home builders and alterations & additions are particularly strong. This could be a pulling forward of future demand, the broker warns.

Hence, it is unknown what sort of growth will occur in FY22 as stimulus rolls off. How much is a catch up with demand and how much is a pulling forward is open to debate, UBS agrees, albeit the risks are still to the upside for BlueScope Steel.

Greater demand for detached housing and renovations has underpinned Australian activity and the broker assesses BlueScope continues to take market share from tiles and timber framing. Such tailwinds are unlikely to abate, which provides upside risk to ASP earnings. UBS forecasts 4% per annum growth over the next three years for Colorbond, to 49% of total ASP volumes.

Colorbond is already around 50% of new detached homes in Australia, supported by its superior access in regional areas compared with tiles, and as it is lightweight this allows for greater spans in construction. Moreover, the pandemic could push more buyers into areas that favour Colorbond.

North Star

While North Star did not contribute to the materially better performance in the first half, Ord Minnett suggests the improved earnings profile is still impressive because of the elevated capital expenditure required for the North Star expansion.

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