As economies are tweaked for a rebound from a pandemic-suppressed 2020, BlueScope Steel ((BSL)) is in a strong position, with its home construction and roofing products at the forefront of demand.
The company has benefited from government stimulus for home building in Australasia, reporting strong coated and painted product demand, and households have responded to mobility restrictions by taking the opportunity to renovate.
After several upgrades late last year BlueScope now expects unaudited earnings (EBIT) of $530m in the first half, an increase on prior guidance of $475m. Financials are expected to be reported on February 22.
UBS finds limited detail on just where momentum for the latest upgrade stems from, although acknowledges building products in Asia and North America stood out as earnings are now double the second half of FY20.
A further increase in guidance is a great outcome, most brokers agree, with construction demand resilient and leading to the highest mill sales volumes in a decade for Australian Steel Products. Customers are also buying more from domestic suppliers, while distribution channels continue to restock.
UBS notes December quarter detached housing approvals were up 30% and calculates BlueScope has around 50-60% of the new roofing market. Housing activity is also skewed towards regional areas, which favour Colorbond as roofing material. Hence, the broker suspects volumes for Colorbond and steel product margins in Australia could surprise to the upside in 2021.
Australian detached approvals are also near record levels and UBS anticipates these should lift further in 2021. In fact, it may take a hike in the rate cycle or tighter lending standards to curb the exuberance.
Morgan Stanley believes this latest update is likely to precede an exceptionally strong second half, given current steel spreads (the difference between the production cost and selling price of steel). Demand is robust, although the broker highlights the uncertainty surrounding sustainability of both demand and wide steel spreads.
Macquarie also notes lower-priced inventory and rising steel prices have augmented margins and the impact should subsequently ease. Higher spot steel spreads in both Asia and North America are moderated by the uncertainty surrounding the impact of the pandemic and, as a result, management is cautious about extrapolating strength from the first half.
Capital Management?
Free cash flow is higher but Ord Minnett expects the board to be conservative regarding capital management, although suspects a share buyback could be announced with the full-year results in August. UBS agrees, amid strong cash generation, attention will soon turn to the resumption of buybacks.
North Star
Ord Minnett assesses the macro economic backdrop for steel markets is positive because of rising global activity, and over the medium term the expansion of North Star should offer high-quality production growth.
At North Star steel spreads improved during the half year, although earnings were slightly lower than the prior half because of pricing lags. Macquarie expects further upside at North Star will ensue as high spot spreads are realised in the second half.
US competitors continue to experience strong underlying demand, particularly in the automotive industries. Yet, US steel spreads are well above long-term averages which suggests a negative outlook to UBS.
The broker is wary of long-term scrap prices and spreads, as China has re-entered the trade and new US capacity is scrap intensive, while acknowledging the outlook for housing in the US is improving and this is a higher quality contributor to BlueScope earnings.
FNArena’s database has three Buy ratings and three Hold. The consensus target is $20.48, suggesting 25.5% upside to the last share price. Targets range from $18.25 (UBS) to $23.00 (Ord Minnett).
