Steel Prices Still Underpinning BlueScope

Australia | Apr 28 2021

As BlueScope Steel revises guidance higher, once again, assessments of where peak earnings lie are becoming even more critical to the outlook

-Demand supporting the earnings outlook into FY22
-Are earnings nearing a peak?
-Potential for cash returns enhanced

By Eva Brocklehurst

BlueScope Steel ((BSL)) has developed a habit recently of revising guidance higher as its two principal earnings drivers, Australian Steel Products and North Star in the US, combine in a show of strength. The company now expects second half earnings (EBIT) to be $1-1.08bn, from prior guidance of $750-830m, driven primarily by improved steel pricing and volumes.

North Star stood out, which was no surprise to brokers given high spreads for hot rolled coil. Australian Steel Products also benefited from both high spreads and very strong domestic demand, particularly in high-value building products such as Colorbond. Building products margins in North America also expanded, supported by rapidly rising steel prices.

Ord Minnett shifts second half earnings forecasts to $1.06bn, with its FY21 estimate now 16% higher at $1.59bn and FY22 estimates at $2.07bn. The broker expects strong conditions will continue throughout 2021 and this should allow BlueScope Steel to shore up an impressive balance sheet and undertake capital management initiatives.

Over the next three months there is significant potential for upside and capital management, Morgan Stanley agrees, yet over the medium term, steel prices are expected to revert to the mean, although they could remain above historical averages for some time.

Moreover, running spot prices through the broker's modelling implies around 80% in upgrades to estimates that are already well above consensus. Morgan Stanley does not incorporate this into forecasts but anticipates a continuation of positive market trends.

FY22 earnings of $2.1bn are forecast based on conservative spread assumptions. The company has ended the first half with $305m net cash, enough to cover capital expenditure at North Star.

Peak Earnings?

Demand may be robust, enough to support the earnings outlook into FY22, yet Credit Suisse considers the company's earnings are nearing the peak of what can be achieved from the current asset base.

Diminishing returns to the share price are also anticipated from earnings upgrades and the broker assesses the market is rightly questioning the sustainability of earnings, noting the reluctance to pay for upgraded performance.

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