FY09 Earnings The Key For BlueScope

This story features BLUESCOPE STEEL LIMITED. For more info SHARE ANALYSIS: BSL

The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

While May is historically a time for confessions from companies that are going to fall short of previous earnings guidance BlueScope Steel ((BSL)) has shown this is not always the case, the company yesterday reiterating its full year earnings guidance of around $780 million.

As Credit Suisse notes this was slightly above market consensus of just below $750 million, though it was broadly in line with the stockbroker’s own forecast. It was better than Citi had expected though and the latter has reacted by lifting its earnings per share (EPS) forecasts by 3% this year and by 7% in FY09 to 107.3c and 74.9c respectively.

This compares to Credit Suisse at 107.6c and 95.5c respectively, while JP Morgan is at 108.3c and 96.6c and the FNArena database shows consensus estimates of 103.1c and 83.7c respectively. It is the FY09 numbers that is generating a range of broker opinions on the stock, Citi and GSJB Were suggesting the shares are a Sell at current levels while Merrill Lynch, JP Morgan and Credit Suisse see the stock as a Buy.

For Citi a Sell is justified as it considers the steel market is moving close to a peak, at which time margins for steelmakers such as BlueScope will start to be compressed. While accepting steel prices have rallied of late on constrained supply the broker points out prices for steel companies tend to peak earlier than physical steel prices, which implies the risk for BlueScope’s share price is clearly to the downside at current levels.

GSJB Were takes a valuation approach to its rating, pointing out the stock is currently trading on around 14 times its FY09 earnings, which is above both its two-year trading band and its global peers on around 12x earnings. As well the broker points out a scheduled blast furnace reline is expected to cost around $200 million but may end up costing as much as $270 million based on current commodity prices, so it also sees downside risk to its forecasts.

Credit Suisse has looked more at the positives from the earnings update, pointing out the company is ahead of schedule in attempting to trim $100 million from its working capital expenses by June 30 and its Asian earnings are starting to improve.

In the broker’s view the ongoing tight steel market should continue to prove supportive for prices and while foreign exchange movements are negatively impacting earnings at present it can see as much as $100 million in upside to its numbers by FY10 to support its positive view.

JP Morgan also sees upside, pointing out its FY09 number is around 19% above market consensus as it sees earnings risk firmly to the upside from stronger hot rolled coil prices. The broker notes it is forecasting a price for this product of US$850 per tonne next year, while Asian producers are proposing prices in excess of US$1,000 per tonne in coming quarters.

As a result the broker expects upgrades to consensus earnings forecasts, as on its numbers if such prices could be sustained through FY09 the company could earn in excess of $920 million compared to the broker’s current forecast of $722 million.

Overall the FNArena database shows three Buy ratings, one Accumulate, four Holds and two Sells, with an average price target of $11.45, up slightly from $11.34 pre the update on guidance but below the median target price according to Thomson One Analytics of $12.20. Merrill Lynch is the high marker with a $14.00 target while Were’s at $9.61 is the only broker with a target below $10.00.

Shares in BlueScope today are slightly stronger and as at 1.05pm the stock was up 8c at $10.89, which compares to a trading range over the past year of $8.55 to $12.65.

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