BlueScope guides to stronger earnings on back of rising steel prices

Following on from the 2% kicker it received yesterday, on the back of a favourable broker note by Goldman Sachs, BlueScope Steel’s (ASX: BSL) announced increase in earnings guidance for the second half of FY22 should see the share price further ahead at the close today.

Adding to stronger momentum for the upbeat result this morning was a strong session in futures trading overnight. Unsurprisingly, BlueScope was up around 4% at the open today.

BlueScope now expects earnings for the period to be in the range of $1.375bn to $1.475bn, above the prior guidance range of $1.2bn to $1.35bn.

Much of the increase is being attributed to earnings expectations for North Star and the North America coated business due to better-than-expected realised steel prices and spreads in the US.

Beyond North America

Beyond North America, the outlook for BlueScope’s other businesses are in line with previous expectations.

While management flagged softer than expected domestic despatch levels from the Australian steel products segment - due to supply chain disruptions – this is being offset by stronger realised steel spreads, plus better than expected contributions from the downstream businesses.

“With the ongoing strength in raw material prices combined with continued supply chain disruptions, BlueScope expects net working capital employed to remain elevated during the current half,” management noted.

Given that BlueScope did not elaborate further on the revised guidance, investors will have to wait for BlueScope’s financial results for the year ending 30 June 2022 (due out 15 August) for further updates.

Upgrade to buy

Meantime, having run the ruler over BlueScope’s group margins – which are above US steel peers, Goldman Sachs has upgraded the company to Buy from Neutral (target price $25.30).

The broker thinks BlueScope’s Australian painted & coated steel (20%-plus margin) deserves to trade on 8x earnings (currently trading at 3x earnings).

“We believe the higher value Australian painted and coated steel business which represents 20% of group volumes and 30% of group EBITDA should trade at 8x, in-line with the Australia and US building comps multiple,” the broker noted.

If the recently announced acquisition of 900ktpa (capacity) Coil Coatings business for US$500m, closes in 2H22 as planned - and the company lifts Coil Coatings utilisation to over 80% - the broker expects BlueScope’s global painted steel production to increase to over 4Mtpa, representing 50% of the company’s 8Mtpa (FY22E) global steel volumes.

The company expects the transaction to be immediately EPS accretive.

In summary, Goldman’s upgrade is based on:

• Compelling valuation and free cash flow (FCF): Trading at 0.8x net asset value ($22.7/sh), 3x NTM earnings and on a FCF yield of 20% in FY22, and 10% in FY23.

• Painted steel & comp analysis implies BlueScope is undervalued: Based on Goldman’s estimates, an increase in utilisation to 80-90% could lift the broker’s group earnings [estimates] by up to $200m or 10% (before any product mix improvements).

• US steel price outlook remains positive: Th broker’s FY23 earnings/EPS would increase by around 50%, and 70% at spot.

BlueScope Steel share price over one year.