Australia | Jul 01 2006
By Chris Shaw
In keeping with the market’s trend over the past few months of slamming stocks that disappoint on earnings, BlueScope Steel (BSL) shares fell heavily yesterday after advising the market its EPS for the current financial year would be at the lower end of expectations.
Management has revised its earnings range to between $0.65-$0.67 per share, compared to a previous range of $0.65-$0.75 per share and a market consensus of $0.685. This is before as much as $200m in restructuring costs from the closure of its tin plate operations at Port Kembla, some contract losses in Taiwan and the impact of higher aluminium and zinc prices, which it has not yet been able to pass on to customers.
At the same time the company provided an update on its growing Asian operations, which is significant as the region accounts for about 20% of the company and is the focus of much of its growth-focused expansion.
ABN Amro, which rates the stock as Hold with a price target of $7.59 (up from $7.00 previously), suggested the update was a mixture of the good, the bad and the ugly. The good was the outlook for steel pricing and the Asian operations as well as success in cutting costs, the bad was the downgrade to current year earnings, while the ugly was the impact of ongoing cost pressures and domestic demand.
While not changing its current year forecast as the new guidance is in line with its estimates, the broker has lifted its earnings estimates for FY07 by 40% to $575m to reflect what it sees as a progressive recovery in domestic downstream costs thanks to price increases, as well as higher assumptions for the company’s Hot Rolled Coil (HRC) operations.
The broker regards the Asian strategy as a positive, as the capacity expansion program remains on time and budget, which should see improving returns from next year. UBS is not so optimistic on the Asian business though, voicing its concern about the level of emerging competition.
Despite this the broker has not changed its EPS forecasts for FY07 or FY08 of 80c and 77c, even though it has cut its current year estimate to 67c from its previous top of the market forecast of 74c. It continues to see upside risk to next year’s consensus earnings estimates though, thanks to the likelihood steel prices will remain strong through the remainder of this year. The broker rates the stock as Neutral 2 with a price target of $8.50.
GSJB Were is another to suggest the company’s Asian strategy is unlikely to act as a catalyst for the share price, as it sees ongoing uncertainty regarding the timing and size of any improvement in the domestic and Asian downstream businesses. The broker has made minor revisions to its forecasts in line with management’s revised guidance, resulting in its valuation falling to $8.27 from $8.42. It’s Marketperform, L/T Hold rating has been maintained.
Merrill Lynch has a more aggressive $10.50 target price on the stock to go with its Buy rating. The broker suggests while on face value the updated guidance is disappointing the underlying result is actually better than it appears. It expects the higher aluminium and zinc costs to be made up in the September quarter for the Asian operations and part of the Australian and New Zealand operations, with the balance of the costs to be recovered in the following months.
While the broker is currently revising its earnings forecasts, it has a valuation on the company of $9.47 and suggests the share price may be re-rated towards a multiple of about 12x its trend earnings, which it estimates at $620m.
One of the more negative on the stock is Credit Suisse, which rates it Underperform with a share price target of $8.00, the broker’s view reflecting a concern there is more possible downside for earnings if current cost recovery assumptions are not met.
CS sees the deferral of some Asian capacity (management have decided to defer a second metallic coating line in Indonesia) as a sensible option given the recent crunch in margins at the same time as the advent of the ASEAN free trade zone has made shipping feedstock between markets more economic. It also notes the level of competition in Asia remains fierce, while there has yet been no financial evidence the company’s expansion strategy in Asia is actually working.
According to the FN Arena database Bluescope Steel is rated slightly negatively by the market overall, the stock receiving two Buy ratings compared to five Hold recommendations and three Sell ratings. The average target price is $7.93, which compares to a median price target of $8.35 according to Thomson One Analytics.
The last closing price for BSL was $8.01.