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

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BlueScope Steel Ltd

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.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Mathew Hodge

Director of Equity Research, Australia
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Mathew Hodge is director of equity research, Australia and New Zealand, for Morningstar Australasia Pty Ltd, a wholly owned subsidiary of Morningstar, Inc.

Hodge joined Morningstar equity research via the acquisition of Aspect Huntley and was previously a director on the team from 2019. He has approximately 20 years of experience, primarily covering the metals and mining sector. In addition, Hodge has sat on Morningstar's economic moat committee since 2014. More recently, he led the refresh of our capital allocation methodology in 2020 and chairs the subsequently formed capital allocation committee. In 2001, Hodge joined Aspect Huntley, which was acquired by Morningstar in 2006.

Hodge studied mining engineering at the University of New South Wales and previously worked in mining, principally as a mining engineer in underground coal. He holds the Chartered Financial Analyst® designation.

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