Where is the margin recovery?
1H23 RESULT
Need To Know
- 1H earnings in-line $851m, mid-point of $800-$900m guidance range
- Strong cash flow in 1H. Buy-back extended, to a further $380m
- 2H earnings guidance of $515m, vs market at ~$630m
Earnings delivered at the middle of EBIT guidance range with the dividend also inline. Note that the dividend is now fully franked.
Steel volumes held up well in the US, whilst AU labour (primarily with customers) and weather issues reduced volume growth. Strong cash-flow performance benefitted from a working capital release, with some offset driven by increases in gearing which funded additional CAPEX in the half.
2H23 guidance comments capture most of the attention today. EBIT guidance of $480 – 550m (US$515m mid-point) implies a softer 2H vs Street at ~$630m. This is driven by softer Asian and US steel margins. Volumes are expected to remain around current levels. US’s North Star business continues to ramp as capacity upgrades come through over the next 12 months.
The market is likely to be downgrading FY23E by ~10% post this result. BSL is guiding to a slower pick up in margins - China demand growth has yet to return and input costs (iron ore/coal prices) remain elevated.
Share prices of US steel peers are +30% CYTD vs BSL +16% (before today’s move).
Investment View
With BSL calling out a delay to realised steel margins, the market will need to downgrade FY23E EBIT numbers today. Guidance could look conservative if China activity levels rebound into Spring, and AUS/US activity levels remain well supported during 2023.
BSL currently trades at ~5x EV/EBITDA, well below the long-term average of 9x, and below US steel peers at 6-7x (which is also low relative to history).
On a price-to-book measure, BSL is trading at 0.8x vs the long-term average of 0.95x. These multiples appear to be low, we expected improved steel margins across both Asia and the US through 2023.
Longer-term, increased volumes from the North Star asset, along with the potential for additional capital management have the potential to re-rate the share price. We rate BSL a Buy. Near-term catalysts: restart of BSL on-market share buy-back, evidence of China steel consumption expanding, higher steel margins.
Stock Overview
Share Price
Company Overview
BlueScope Steel is an Australia-based steel production company. The Company is focused on providing steel materials, products, systems and technologies across North America, Australia, New Zealand, Pacific Islands and throughout Asia.
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