In Nov 2017, BlueScope Steel Shares (ASX BSL) raised its FY18E-20E EBIT by 2%-8% as a result of recent strength in global steel markets. The reasons BSL shares are up are due to higher steel prices, domestic volumes and demand for export coke, enabling stronger margins. BSL stock performance has been strong.
Recognition of previously impaired assets within the Tate Blue scope JV (TBSL JV) would also generate a one-off benefit of $12m. Meanwhile, Bluescope Steel shares expect to benefit from the US tax reform with approximate 7% decrease in tax for FY17 and 11% afterwards. The potential impact could result in $40-50 million increase in NPAT and 12-13% rising in EPS.
ASX BSL is a steel products supplier on global building and construction markets. It was listed on ASX since 2002 with a current market capitalization of approximately $8.69b. It mainly operates in Australia, New Zealand, Asia and North America. EBIT of BSL in FY17 rose by 89% to $1,105.00m.
North Star Acquisition Enhances BSL’s Financial Performance
BlueScope Steel shares completed its acquisition of North Star in November 2015. North Star has delivered consistent financial performance and strong returns on invested capital. North Star’s strong free cash flow generation contributed significantly to BSL’s free cash flow. This transaction to acquire the remaining 50% shares in the North Star also boosted Bluescope Steel shares. After 2015, Bluescope share price tripled to 2018.
Rising Energy Costs And Higher Taxes
BSL stock price still faces significant challenges with rising electricity and gas costs. Higher input costs threaten to put future profits under pressure and have a negative impact on the earnings forecasts. Energy cost in Australia rose 75 percent from FY2016 to the end of 2017 to $145 million, putting pressure on the bottom line.
The recent trend in the industry needs to reform. Australia has higher taxes including new and increasing carbon tax compared with other countries. The federal government intervention in the approval process and the cost of regulations are seen as the significant barrier going forward.
Higher AUD Will Reduce Export of BSL’s Products
One of the primary business of BSL shares, the export of materials, is greatly influenced by AUD volatility. A higher AUD may drag exports down, putting pressure on sales revenue and profits in FY18.
Three main factors would raise the value of Australian Dollar in 2018. Firstly, the US Federal Reserve increases the interest rate slower than expected due to a slowing of the economy, putting pressure on the USD. Secondly, the Reserve Bank of Australia (RBA) is forecasted to lift the interest rate to ease inflation in FY18, putting upward pressure on the AUD. Thirdly, with the Chinese government intervening in domestic economic growth, demand for commodities and AUD would be driven up.
Australian Mining Industry Highly Productive
Australia is a global top 5 producer of major minerals including gold, iron ore and zinc due to abundant reserves of mineral resources. The mining industry has shown high productivity in the past several years. It attracted over 50% of foreign direct investment and the productivity of the Australian mining sector is 42% more than the average productivity of global competitors. Mining in Australia reached 735 million tonnes last year and it constituted 22 percent of world total amount.
Profit Increased 102% To $459.4 Million
The FY17 results continued to show strong performance and solid growth. BSL shares recorded revenue of $10.8bn, 17% higher than the previous year which has been above the peer average of 9.71%. Total profit increased 102% to $459.4 million. Additionally, Return on Investment Capital (ROIC) has increased to 18.5%.
Additionally, Bluescope Steel shares have greater liquidity with net interest cover at 12.82, rising 174%. Another highlight is the strong cash flows of $749m, cutting net debt 70% to $232.2m and leverage to 0.16x.
BlueScope Steel Investigation Over Potential Cartel Conduct
In August 2017, ASX BSL shares announced it was the subject of a regulatory investigation. During FY2016, BlueScope was investigated because of potential cartel conduct by the Australian Competition and Consumer Commission(ACCC). A number of BlueScope employees are suspected of fixing the price of steel in the period from late 2013 to mid-2014. The is ongoing and could present an unknown risk for the company.
Cautiously Optimistic Outlook For FY18
Despite the strong performance in 2017 of BSL stock, the company is cautiously optimistic for the 1H FY2018 due to macro factors such as the lower U.S. steel margins, the trade restrictions in global markets and higher raw material prices. The underlying EBIT is expected to be around 80% of 2H FY17 data at $527.3 million.
Taking financial indicators into account, the current performance of ASX BSL share price is strong. However, potential risks in the future should not be ignored. BSL still has a number of risk factors which are out of their control such as material costs, energy costs, competition and foreign exchange rate volatility.
MF & Co. Asset Management and the author do not own BSL stock.
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