Posted on 24 Jan 2017
Shares in steel producer BlueScope surged Tuesday with sentiment buoyed by a big hike to its profit forecast thanks to stronger than expected steel prices.
The steelmaker said it now expects to post a pretax profit of around $600 million for the December half, which lifted its share price 8.1 per cent to $11.22.5c by late in the morning session.
Ahead of the upgrade, some analysts had pencilled in a price of more than $11 a share for Bluescope script, amid both optimism for the outlook for steel prices and also management's efforts to lift productivity.
As recently as November, the company said the pretax profit would be "at least $510 million" with sentiment at that time buoyed by the election of Donald Trump as the incoming US President which was expected to see a lift in infrastructure spending in that market.
Along with higher steel prices, the big uplift in the rice of iron ore has given its New Zealand iron sands unit a fillip.
"Our building products segment has had a strong half particularly in the North American business which benefited from higher steel prices and margins," the company said. "The India business also saw positive earnings growth with higher margins and volumes."
By division, the Australian steel products unit's pretax profit is running at around $240 million, North Star in the US $210 million; building products in ASEAN, North America and India, $110 million, the domestic building products arm around $50 million with New Zealand and Pacific Steel contributing $40 million, it said.
Ahead of the upgrade, Goldman Sachs was among the most bullish brokers on the outlook for Bluescope, with a 12-month share price target of $11.53, based on a pretax profit forecast for the half of $568 million. It revised its forecasts earlier this month, based on stronger steel prices along with the decline in coking coal prices in the latter part of the December half.
Unstated was the payroll tax concession received from the NSW government, together with a freeze to pay rises agreed to by employees aimed at ensuring the survival of the Port Kembla works. When BHP was threatening to shutter its remaining steel plant in 2015, the then NSW government gave the company $60 million in payroll tax relief. For calender 2016, relief totalled up to $25 million, a further $20 million in 2017 and $15 million in 2018. The total benefit was to be repaid over the 10 years from 2020.
At the same time, the company achieved further savings of $180 million from pay freezes and the axing of 500 jobs from the steelworks.
A number of analysts had told clients in the past six weeks to expect the good times to continue if steel prices remain elevated.
"The material recovery in East Asian and US [steel price] spreads in December, if sustained through to February, will likely lead to much more constructive forward guidance, in our opinion," Goldman Sachs analysts told clients in a recent note, referring to the prospect of further profit upgrades.
Other analysts are less sanguine about steel prices remaining elevated, with Citi warning that prices may decline, moving further into the March quarter. Even so, it reckons Bluescope is still attractive.
"Bluescope is not about exposure to the vagaries of the steel cycle but rather exposure to a business that continues to undergo substantial transformation that will ensure its profitability and cash flow capability even at the depths of the steel cycle," it told clients following the upgrade.
Bluescope has a habit of upgrading forecasts close to the release date, once it has a better idea of how its units are trading.
