BlueScope Steel has upgraded its earnings guidance, but we believe the company is retaining a conservative view of second-half FY18.
The stock is trading below our base-case valuation, and we see further earnings and valuation upside from US prices holding, as well as scope for a significant increase in capital returns. We maintain our Accumulate recommendation on BlueScope and have raised our target price to $19.00 from $18.50.
OML view – We believe the announcement retains an element of conservatism, noting guidance implies a North Star spread that is US$95/t higher than in the first half. We estimate it will be US$130/t higher, although the half-on-half difference could be as great as US$150/t based on our observations. We calculate a US$10/t movement in realised spreads results in $13–14m of additional EBIT. We have upgraded our FY19 earnings forecast to reflect our assumption of continued strength in US steel prices, but we have reduced our FY18 estimate due mainly to the delay of anti-dumping measures into FY19, and to reflect higher zinc and aluminium prices. We forecast EBIT of $719.3m in the second half, implying $1.236bn for FY18.
US steel prices – US hot rolled coil prices have climbed steadily since the announcement of the US Section 232 steel tariffs in March 2018. Prices have since settled at elevated levels, having spent more than two months (at time of writing) within 5% of the current spot price of US$972/t. Platts is reporting that mills are running at strong capacity, with June and July production reportedly being offered at prices in the range of US$1,014/t to US$1,036/t. We estimate that for every three months that current pricing holds, BlueScope should grow its full-year EBIT by about $130, all else being equal, and our discounted cash flow valuation would increase by 18cps.