Morningstar | Bluescope Beginning to Appear Undervalued Despite Softer U.S. Steel Prices; AUD 12.40 FVE Unchanged
We make no changes to our AUD 12.40 fair value estimate for no-moat Bluescope Steel following the firm's earnings update. Bluescope, citing lower-than-expected steel prices, cut guidance for fiscal 2019 operating earnings to AUD 1,350 million from about AUD 1,400 million previously. We reduce our near-term forecasts, but we had already expected significant declines in steel prices over the medium term, meaning the effect is immaterial to our valuation. Shares in Bluescope were last trading at AUD 11.01 and are beginning to screen as attractive.We reduce our fiscal 2019 operating income forecast to AUD 1,359 million from AUD 1,406 million previously, but our long-term forecasts remain intact. The firm now expects a USD 150 per metric ton fall in benchmark steel spreads, down from USD 130 per metric ton that was previously expected. Lower sales volumes in Building Products Asia and North America are also a drag on the top line, while longer leads times in Buildings North America are reducing despatches and squeezing margins. We expect a sizable contraction in global steel prices over the next five years, from current levels that have benefited from Chinese supply-side reforms and United States steel tariffs.
On a positive note, design and engineering works on the North Star capacity expansion project have begun. We continue to view this expansion as value accretive, given the privileged nature of the North Star asset. We believe there is a 50% probability the project will be approved, adding about AUD 1.15 per share in value. Bluescope intends to provided updates in its fiscal 2019 results during August.
Bluescope also announced it is extending its share buy-back programme, doubling it to AUD 500 million, supported by a net-cash position and strong free cash flows. At the current depressed share price, this is an attractive opportunity for the firm to buy shares back at a discount to our fair value estimate.
BlueScope is a manufacturing technology company. Co.'s segments are Australian Steel Products, which produces coated and painted flat steel products for building and construction customers and commodity flat steel products; New Zealand & Pacific Steel, which consists of New Zealand Steel, Pacific Steel, New Zealand Minerals, and BlueScope Pacific Islands areas; BlueScope Buildings, which servicing the low-rise non-residential construction; Building Products ASEAN, North America and India, which producing metal coated and painted steel building products; and Hot Rolled Products North America, which includes a single site electric arc furnace producer of hot rolled coil in Ohio, the U.S.
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