BSL Details

BlueScope Steel Limited (ASX: BSL) is one of the major manufacturers of painted and coated steel products globally. With rich expertise in steel, the company delivers vital components for houses, buildings, structures, automotive, among others. It has a robust global network with over 160 operations and sales offices across 18 countries. BSL has operations across North America, Australia, New Zealand, Pacific Islands, and throughout Asia.

Healthy Performance in FY21 (For the Year Ended 30 June 2021)

• The company has delivered a record underlying EBIT of $1.72 billion in FY21.
• Its all operating segments delivered exceptionally well performance supported by strong demand and steel spreads.
• Resultantly, it reported an increase in its net profit after tax (NPAT) to $1.19 billion in FY21, up by $1.10 billion over FY20.
• The company has declared a final unfranked dividend of 25 cents per share, an increase from 8 cents in the PCP. Further, it has announced a special unfranked dividend of 19 cents per share and an on-market buy-back of up to $500 million.

Exhibit 1: Profitability Trend

Source: Analysis by Kalkine Group

Raised Earnings Guidance for H1FY22

The company, on 21 October 2021, has raised its underlying earnings before interest and tax (EBIT) guidance for H1FY22 to between $2.1 billion to $2.3 billion against its earlier guidance range of $1.8 billion to $2.0 billion and the business is benefitting from the strong spreads, prices, and demand.

The primary contributors to the improved outlook for 1H FY 2022 underlying EBIT are: 1) North Star, the company’s US mini-mill, driven by the stronger than anticipated hot rolled coil prices as well as spreads, 2) Australian Steel Products, with the further higher domestic volumes, mainly in the higher value products for the construction as well as building sector, and 3) the North America coated products business, as there have been strong steel prices as well as continued robust demand.

An Array of Growth Opportunities

The management stated that the advantage of US steel industry consolidation and rationalisation, along with government infrastructure investment and robust end-use demand resulted in a strong Midwest hot-rolled coil (HRC) demand. In the US, growth in the steel intensive infrastructure for e-commerce, including warehousing as well as data centres, has been supporting the demand for BlueScope Properties Group’s industrial development solutions.

Key Metrics

The company’s gross margin and ROE reported a sharp improvement in FY21 over FY20 to 28.6% and 16.7% compared to 23.0% and 1.5% in FY20, respectively. Further, the current ratio improved over the years to reach 1.87x in FY21 compared to 1.58x in FY17. Thus, the decent liquidity position of the company might help it in achieving growth objectives.

Exhibit 2: Key Financial Metrics

Source: Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form ~16.12% of the total shareholding while the top four constitute the maximum holding. Notably, The Vanguard Group, Inc. and BlackRock Institutional Trust Company, N.A. are holding a maximum stake in the company at 5.49% and 3.87%, respectively, as also highlighted in the chart below.

Exhibit 3: Top 10 Shareholders

Source: Analysis by Kalkine Group

Key Risks

The company is exposed to the risk of a deep or prolonged economic downturn that could affect demand for the group’s products and financial prospects. It is also susceptible to the risk of declines in the price of steel, or any significant and sustained increase in the price of raw materials and no corresponding increase in steel price.

Outlook

BSL generated an operating cash flow after capital expenditure of $898 million in FY21 after taking into consideration the investment expenditure on the North Star expansion. The balance sheet position remained strong with net cash of $798 million.

Its balance sheet strength and cash flows could help the company in fast-tacking its strategic growth plans that includes targeted investment for the long-term growth and resilience of the group, as well as place the business for a low carbon future. Also, the company focuses towards delivering returns to the shareholders.

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Stock Recommendation

BSL has delivered 9-month and one-year returns of ~+31.37% and ~+38.15%, respectively. The stock is trading lower than the average price of the 52-week low-high range for the stock at $14.470 - $26.150, respectively.

The stock has been valued using an EV/Sales multiple based relative valuation (on an illustrative basis) and the target price so arrived reflects a rise of low double-digit (in % terms). A slight premium has been applied to peer average EV/Sales multiple (NTM basis) considering its healthy performance in FY21 as well as improved earnings guidance.

Considering the aforementioned factors along with the decent outlook, we give a “Buy” recommendation on the stock at the current market price of  A$21.22 per share (Time: 2:01 PM (GMT +10), Sydney, Australia) on 27th October 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices

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