BlueScope Steel Transforms US Operations

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Following a significant strategic play in the US, all six brokers in the FNArena database continue to recommend buying BlueScope Steel.

-BlueScope Steel set to transform its US business
-Greater focus on value-added products
-Fast-tracked expansion without added capacity
-A compelling investment, according to Ord Minnett
 

By Mark Woodruff

In what Jarden considers a significant strategic step for the North American business, BlueScope Steel ((BSL)) has entered into a binding agreement to acquire Coil Coatings for US$500m. The company is the second-largest metal painter in the US.

The transaction will potentially enable the North American business to transform its focus to a value-added product (like Colorbond and Truecore in Australia) from a commodity product, explains the broker.

Over the past decade, Morningstar explains, the company has sensibly restructured its relatively high-cost (globally) Australian operations away from competitive commodity export markets to value-added metal coated and painted product brands. Ten years ago, the share price was around $2.30.

In more recent times, the company’s share price hit an $8.00 low soon after the outbreak of covid in early 2020, and then more than tripled to above $24.00 by August last year.

The current share price of $20.91, suggests there is 24.6% upside to the $26.05 average 12-month target price in the FNArena database, where there are six broker ratings, all with a Buy or equivalent recommendation. On the whole, analysts retained existing target prices after reviewing the potential acquisition.

According to management, Coil Coatings is expected to boost BlueScope Steel's US footprint to a level that would otherwise have taken a decade or longer to build. Importantly for Morgan Stanley, this fast-tracked expansion occurs without adding new capacity in the market.

Macquarie expects the cash-funded purchase would be immediately earnings accretive and provide $12m in synergies in the subsequent three years. The analysts point to immediate promise in using production from BlueScope’s North Star operations, as the company to be acquired coated around 115kt of heavy gauge steel in 2021.

The transaction would also boost BlueScope's exposure to construction end-markets and provide revenue synergies, which have not yet been included in the broker’s forecast.

Potential for upside

Jarden believes the acquisition should fast track the growth of BlueScope’s US capabilities. The company’s coating/painting capacity on the west coast is expected to expand to 1.3mtpa from 475ktpa at present, with strategically important east coast capacity. The broker, not one of the seven brokers updated daily in the FNArena database, retains its Overweight rating and $23.60 target price.

Goldman Sachs, also not one of the seven, points out the acquisition opens up around 400ktpa (capacity less current production) of growth and further value-add investment in galvanised steel from BlueScope’s North Star Hot-Roll-Coil mini-mill. More high-margin Australian Colorbond-type products are also expected to be introduced.

Current operations at Coil Coatings have a low utilisation rate, explains Macquarie, held back by steel supply constraints, labour constraints and focus on internal supply by the seller, Cornerstone Building Brands. With the aim of lifting output/utlisation, Citi notes management intends to incur sustaining capital expenditure of -US$4-5m per annum, with an additional -US$25-30m to be spent over six to seven years on plant upgrades to optimise line performance.

UBS assume utilisation improves to around 75% by FY26 from circa 60% currently, which would represent an approximate 15% market share in a 4 million tonne market.

Importantly, notes Macquarie, BlueScope has secured a five-year contract to continue supplying Cornerstone Building Brands, which accounted for half of sales and a third of capacity. It’s thought the company is keen to benefit from BlueScope’s broader coated steel experience and product capability.

Outlook for spot steel spreads

With steel spreads heading higher again, Macquarie considers momentum is improving for BlueScope and estimates spot prices could lift in FY23 by 30% versus its current base case.

By contrast, while Goldman Sachs is positive on the global steel demand backdrop (ex-China) in 2022, forecasts for second half Australian and US spreads are being impacted by strong metallurgical coal, iron ore, scrap, pig iron, as well as aluminium and zinc prices.

The broker maintains its Neutral rating due its forecast for ongoing high input prices that will continue to weigh on spot steel spreads and the BlueScope Steel share price in the near term. The analyst sets a $21.14 target price.

Despite medium-term risk around US spreads and the Australian Steel Products (ASP) division, UBS remains positive on a one-year outlook due to robust ASP volumes and the Colorbond price.

To end on the most optimistic of notes, Ord Minnett considers BlueScope is one of the most compelling investment ideas across all its coverage based on near-term volume growth, balance sheet strength and ongoing capital management potential.

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