Australia | Aug 21 2007
By Chris Shaw
In one of the few cases where exposure to China has not proved extremely beneficial BlueScope Steel (BSL) has reported lower than expected earnings, the company’s profit of $643m falling short of the UBS forecast of $689m thanks in part weak performance from the group’s Asian operations including those in China.
As the broker notes, there is little prospect of an improvement in the shorter-term with management indicating conditions in that market are largely out of their control. JP Morgan agrees, noting the Chinese market remains structurally difficult and the company must deal with high input costs at the same time as it has little control over pricing.
With imports impacting on the company’s Australian operations as well the broker has downgraded its rating to Underweight from Neutral, matching the UBS Sell rating. Both brokers have trimmed their earnings forecasts following the result, with UBS cutting its estimates 4-5% in FY08 and FY09 and JP Morgan lowering its FY08 estimate by 3%. The latter points out its profit forecast for next year of $584m is now 13% below pre-result consensus estimates.
In earnings per share (EPS) terms UBS expects the company will report 84c in FY08 and 75c in FY09, which are below pre-result consensus forecasts of 90c and 77c and the broker’s old forecasts of 88c and 77c respectively. Others have followed suit, Deutsche Bank also trimming earnings forecasts following the profit result.
Merrill Lynch sees the issue as one of investors continuing to take a positive view on the company while ignoring warnings signs of pressure on margins from higher input costs, which in its view is a dangerous approach. Deutsche Bank agrees, suggesting the stock is expensive at current levels. JP Morgan agrees, noting the stock is at a solid premium to its valuation of $9.15.
Those to take positives from the result include ABN Amro and Macquarie, the former noting cash flow generation was strong and with gearing coming down there is scope for options such as additional capital management initiatives.
The broker has made minor increases to its earnings estimates for FY08 and is now forecasting EPS of 84.4c in FY08 and 75c in FY09, while Macquarie has lifted its estimates by 7% and 15% respectively.
The FNArena database shows overall expectations for the company have been scaled down, with the average target price falling to $10.14 from $10.37 prior to the result. This compares to a median price target according to Thomson One Analytics of $10.25. According to the FNArena database the stock is now rated as Buy once, hold four times and Sell five times.
Shares in BlueScope today are slightly higher and at 11.50am were up 3c at $10.78.