Materials

BlueScope consolidates US footprint through $670m acquisition

Mon 11 Apr 22, 12:47pm (AEST)
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Key Points

  • Coil Coatings triples BlueScope's US metallic coating & painting capacity to over 1.3m metric tonnes pa
  • BlueScope will fully fund the acquisition with cash from its balance sheet
  • Management has identified operational and supply chain synergies of around US$12m per annum by year three

BlueScope Steel (ASX: BSL) was up 1.7% at the open following revelations the steel giant is buying the second biggest metal painter in the US, New York Stock Exchange-listed Cornerstone Building Brands' Coil Coatings business for $US500m ($670m).

Following investments in its US North Star mini-mill (US$770m) and the establishment of BlueScope Recycling (US$220m), the Coil Coatings investment brings BlueScope’s investment in North America to more than $4.5bn, employing more than 4000 employees.

Long-term earnings growth

Managing director Mark Vassella described the acquisition of Coil Coatings as a significant step forward in the company’s growth plans for North America by providing immediate and direct access to the large and growing Eastern US region.

With a total capacity of around 900,000 tonnes pa across seven facilities - serving commercial and industrial construction applications – Coil Coatings virtually triples the company’s US metallic coating and painting capacity to over 1.3m metric tonnes pa.

“The Coil Coatings business provides BlueScope with a significant opportunity for long-term earnings and growth through product development and branded products consistent with the BlueScope’s customer service and value proposition around the globe,” said Vassella.

“The acquisition also provides for further integration with BlueScope’s existing US business value chain.”

Funding and synergies

BlueScope will fully fund the acquisition with cash from its balance sheet and is expected to be immediately accretive to earnings per share.

While the key focus is the medium to longer-term opportunity the acquisition provides, management has identified operational and supply chain synergies of around US$12m pa by year three.

Subject to regulatory approval and other customary closing conditions, the transaction is targeted for completion in 2022.

Post completion, BlueScope expects to remain in pro-forma net cash position and remains in a strong position to continue to execute previously announced projects and an on-market buy-back.

Fundamentals

While BlueScope has struggled over the past 12 months, the share price is up around 8% since Russia invaded Ukraine late February on the back of rising steel prices.

What's adding to supply concerns are Chinese lockdowns within some of its steel-producing regions, with big buyers of steel now needing to look for other suppliers.

A tight supply chain and the Russia/Ukraine conflict have also seen global pig iron prices rise around 20% in the last month.

In the recent FY22 half-year result, BlueScope delivered a record underlying earnings before interest and tax (EBIT) of $2.2bn and a reported net profit after tax (NPAT) of $1.64bn.

Management has guided to second half FY22 earnings (EBIT) in the range of $1.2bn to $1.35 bn, and highlighted good demand in key segments, especially in building and construction, coupled with “robust” margins driven by the increased steel prices in Asia and the US.

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BlueScope Steel share price over three months.

What brokers think

Based on the brokers covering BlueScope (as reported on by FN Arena) the stock is currently trading at 22.8% upside to the target price of $25.55. While five brokers have a Buy rating, Macquarie retains a Neutral rating and lowers the target price to $20.90 from $23.75 in light of higher expected spending in the second half.

Following an overall review of both the iron ore and wider mining sector, Ord Minnett increases the target price to $28 from $25 and expects ongoing strong steel demand from China.

UBS lowers its FY22 and FY23 earnings per share (EPS) forecasts by -4% and -7%, on higher input costs but retains a $25.75 target price.

Despite FY22 EPS forecasts falling to match guidance, Morgan Stanley recently upgraded BlueScope to Overweight from Equal Weight.

The broker believes the value in the stock - with its net cash balance sheet and strong cash flow generation - is impossible to ignore. Target price is $25.

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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