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Stock: Bluescope Steel

Stock code: BSL

Share Price: $1.445 (as at close of trade 19th May 2011)

Broker Sell Recommendations:

State One Stockbroking (16th May 2011, share price was $1.47 that day)

William Shaw Securities (22nd March 2011, share price was $1.94 that day)

Macquarie Private Wealth (7th March 2011, share price was $1.975 that day)

Patersons Securities (21st February 2011, share price was $2.30 that day)

Chart

Chart: Share price over the year to 20/05/2011

BlueScope Steel was formerly a business group of BHP Billiton which was seprated at the time of the merger between BHP Limited and Billiton in 2001. BSL was subsequently listed on ASX on Monday, 15 July 2002, at a float price of $2.80 and opened at a healthy $2.90 on day 1. However almost 9 years later early investors have been hammered, with the share price languishing at a 50% discount to the listing price. Shares in BSL closed at just $1.445 on Friday 20th May 2011.

Management at the newly merged behemoth that was BHP Billiton were spot on in deciding to spin off (read: rid themselves of) the business – in the time that BSL shares have halved, the BHP Billiton stock price has more than quadrupled. While things looked rosy for the first few years post-listing and even hit a post-float high of $10 in mid-2007, the share price has been decimated since mid-2008, losing more than 80% of its value. See the 10-year chart below versus BHP:

Chart

Chart: Share price over the 10 years to 20/05/2011 versus BHP Billiton (BHP)

Description

Although BSL’s history dates back to 1915, the company is a spin off from BHP, born as an entity into itself during the merger between BHP and Billiton. It counts as a major steel company in Australia and NZ, supplying flat steel products and painted steel products and steel building products to the building, construction, automotive and manufacturing industries. BSL also operates in Asia and owns 50% of a joint venture in the US, North Star BlueScope Steel. It has a range of brands including Lysaght, Colorbond, Galvabond, Galvaspan and Zincalume.

In 1989, BSL acquired New Zealand Steel, then expanded into Asia in the 90s. In 2004, BSL expanded its China presence by buying Butler Manufacturing and it recently acquired SSX’s distribution business. However the China push may have been too little too late as it is Chinese investment in steel making that is currently challenging margins.

BSL’s major clients are steel distributors, major manufacturers and the construction sector. The company exports hot-rolled coil to the US and services the construction sector and certain manufacturing segments in China.

Earnings

Link to company Earnings Report: BlueScope Steel Half Year Earnings Report – Dec 31st, 2010

Key financials for the past three years

2008A2009A
2010A
Sales Revenue ($m)
10,48510,323
8,614
EBITDA ($m)
1,422522 583
EBIT ($m)
1,065157 233
Adjusted NPAT($m) 59656 148
Reported NPAT ($m)
596(66) 126
Price/Earnings14.2 42.4 25.9
Dividend Yield (%)
4.3 2.0 2.4
Net Profit Margin (%)
5.70.5 1.7
ROE (%)
15.41.0 2.6
ROA (%)
8.21.7 2.5
Net Debt/Equity (%)
43.7 13.3 12.9

 

Broker Recommendations

Many analysts pinpoint this as a stock to avoid at all costs, with a soft outlook and risk around earnings.No less than four brokers on TheBull’s broking panel have a sell on BSL.

John Rawicki of State One Stockbroking has a sell on BSL given the company expects to post a net loss for the second half of 2011. “The company operates a capital intensive business with volatile margins,” says Rawicki. “The strong Australian dollar makes steel imports an attractive alternative, placing further pressure on domestic steel producers, such as BlueScope.”

Macquarie Private Wealth’s Sean Conlan sees a challenging outlook for BSL in the medium term. “While many longer-term valuation metrics appear compelling at current levels, there’s likely to be significant volatility and, hence, risk around earnings,” he says.

Mike Bigwood, Patersons Securities says that the stronger Australian dollar has increased competition from cheaper imports and he believest that high raw material costs will continue to impact margins. “I calculate the return on equity for BSL of between 2 and 5 per cent over the next two years, with a resulting valuation well below $2,” says Bigwood.

Shawn Uldridge of William Shaw Securities is the harshest of all four brokers on the steel producer, telling investors to “avoid” BSL. He notes that steel prices are good, however the problem is that volumes have been low. “The recent profit result came in below expectations and the forward outlook was also downgraded,” says Uldridge. “BSL’s factories are operating well below capacity and their input prices (iron ore and coal) are rising. With a soft outlook and no way of telling when things might improve, BSL could continue to fall away. Avoid.”

Conclusion

In the half-year results announced in February earnings came in below expectations and to make matters worse the outlook for BSL was also downgraded. As is to be expected, investors ran for the door, sending BSL shares tumbling further. Today it sits at a post-float low of $1.445. Whether BSL can pull itself out of the current dire sitution is anyone’s guess, however no investor wants to be the last one off a sinking ship.