BlueScope Steel Undervalued?

Australia | Nov 21 2022

This story features BLUESCOPE STEEL LIMITED. For more info SHARE ANALYSIS: BSL

Brokers generally see value in BlueScope Steel shares despite the macroeconomic backdrop.

-Brokers are generally positive on BlueScope Steel going into tomorrow’s AGM
-UBS estimates the company is trading at a circa -40% discount to key peers
-A backlog of up to one year exists for the Australian steel products division
-US spreads are down though UBS considers North Star undervalued
-Macquarie more cautious on the outlook

By Mark Woodruff

Given BlueScope Steel ((BSL)) is holding its AGM tomorrow, it is timely to review the many moving parts that brokers assess when compiling forecasts.

Over the past decade, the company has restructured its relatively high-cost (globally) Australian operations away from competitive commodity export markets to value-added metal coated and painted product brands.

UBS feels the lower Australian dollar and a US steel spread tracking higher than management’s expectation outweighs weaker-than-expected East Asia hot rolled copper (HRC) prices and higher coal costs. As a result, the analysts see upside to current first half earnings guidance.

The broker points to value on a one-year basis, despite the subdued macroeconomic backdrop and the rising risk of a FY24 downturn for Australian end-markets. It’s felt the US end-markets for cars and non-residential construction will benefit from a normalisation of supply chains, which should lend some support in a potential US downturn.

The company is trading at an around -40% discount to key peers such as American steel producers Steel Dynamics and Nucor Corporation, according to UBS.

The other five brokers in the FNAreana database seemingly agree with Buy-rated UBS on BlueScope’s undervaluation, with the average target price of $20.06 suggesting 20.7% upside to the latest share price. Four of the six brokers have a Buy (or equivalent rating) and two are Hold-rated.

The company continues to take share in the Australian Steel Products (ASP) division, with robust Colorbond pricing and a strong pipeline of work, according to UBS. Backlogs in ASP are still stretching out to just under a year.

The analyst also suggests the North Star Steel facility in Ohio, currently trading at a significant discount to US peers, remains a quality asset, despite spreads falling below the long-run average of US$275/t.

Once buoyant US spreads have eroded significantly in the last month. US mini mill spreads have fallen to US$274/t from above US$400/t in October, while East Asian spreads have averaged around US$228/t in the last month.

Last week, Jarden noted US steel spreads are coming under pressure from a falling HRC price, which had slipped to a new 2022 low of US$650/US short ton, and several US domestic steel mills are approaching breakeven point. It’s estimated around 3-4% of US domestic capacity is set to be idled until early 2023.

However, the analysts believe US steel HRC prices were close to a bottom and suggested BlueScope is set to reiterate first half underlying earnings (EBIT) guidance of $800-900m.

Jarden, not one of the seven brokers updated daily in the FNArena database, maintained its Overweight rating and lowered its target price to $18.60 from $19.20.

Apart from US steel demand and the steel spread, the broker listed other downside/upside risks including Australian and US construction activity, the macroeconomic outlook in China and business expansion prospects for US coated steel products, which received a boost with a US$500m acquisition earlier this year. (BlueScope Steel Transforms US Operations – FNArena).

Other broker views on BlueScope

Two weeks ago, Buy-rated Citi encouraged investors to look past a likely upcoming and material short-term earnings correction resulting from the economic backdrop, given BlueScope was trading at an around -20% discount to the broker’s valuation.

The analysts cited upcoming volume expansion at North Star, rising immigration levels for Australia and stronger medium-term earnings support as Australian detached housing starts per capita were then back at trend levels.

Housing is important, as in Australia it is represents around one third of BlueScope’s domestic steel demand, evenly split between new builds (predominantly detached housing) and alterations and additions.

Macquarie (Neutral) reviewed its BlueScope investment thesis just under a month ago and remained cautious on the outlook for price and spread outcomes, in light of the macroeconomic conditions.

On a longer-term view, the broker also noted a complex path to decarbonisation for the steel industry, made more complex by the quality of steel required from blast furnace producers like BlueScope Steel.

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