BlueScope Steel Earnings: Profits to Fall More Slowly Than Expected; Raising Our Fair Value 10%

BlueScope Steel’s BSL underlying fiscal 2023 EBIT of AUD 1.61 billion was down nearly 60% from last year’s record, but was in line with our forecast. It seems strange given the size of the decline, but the result is strong and reflects profitability only seen with the extraordinary COVID-19-induced steel prices and margins. The adjusted return on invested capital of 13.4% is ahead of our unchanged 10.4% estimated cost of capital. Despite this, we still think BlueScope lacks a moat given global steelmaking is very competitive and Australia’s import exposure given demand is largely close to the coast.

We raise our fair value estimate 10% to AUD 16.50 per share. Approximately half of the increase reflects the lower Australian dollar, which increases U.S. dollar revenue earned in Australia exposed to global market pricing, and the translation of earnings from North Star. First-half guidance for EBIT of AUD 700 million to AUD 770 million is also stronger than we expected. In addition, we raise our long-term earnings expectations for North Star, which accounts for the other half of the fair value increase. We now expect North Star to earn close to its cost of capital in the long run.

We think North Star has traces of cost advantage given it’s a natural scrap collection point and has customers close to the mill. We now expect North Star profits to remain broadly in line with fiscal 2023 levels and the decade-ended fiscal 2023, excluding the bonanza year of fiscal 2022. We think fiscal 2022 reflected steel shortages, trade dislocations, unprecedented margins, and fiscal stimulus. Nearer-term, we still expect earnings to fall but now expect a slower decline given margins and volumes are holding up better than we expected. We raise our fiscal 2024 earnings forecast by 36% to AUD 2.15 per share, close to fiscal 2023′s AUD 2.16 per share. BlueScope is financially strong, declaring a AUD 25 cent final dividend, bringing the full-year payout to AUD 50 cents fully franked.