BlueScope set for recovery as flow of red ink eases
Even so, it is wary of the outlook for growth in China as it looks to seize sales opportunities in south-east Asia and beds down its new Asian venture with Nippon Steel ahead of the launch mid-year of its Zincalume product after 20 years of development.
In the December half, BlueScope lost $12 million, a turnaround from a $530 million loss a year earlier, and expects a small second-half profit, which signals a break-even result for the full year.
BlueScope's shares rallied hard on the rebound, amid optimism that the worst is now behind the company. Its shares closed up 58¢ at $4.35, pulling Arrium, the former OneSteel, higher in its wake. Arrium gained 8¢ to $1.26, before its interim results are released on Tuesday.
"It's a result without any write-downs," said BBY analyst Mike Harrowell. "The shares are trading below net tangible asset value. US steel makers historically have traded at 0.9 times book during periods of low earnings. Its shares should rise to about $6, as long as the growth profile is intact."
BlueScope's net tangible asset backing is $6.86, although closing this gap would depend on no further asset write-downs, Mr Harrowell said.
"The major restructuring is done and being implemented," BlueScope managing director Paul O'Malley said. "We expect to be profitable at this very low point in the market. We have to change our focus to increase sales, increase new product implementation."
BlueScope is to launch its new-generation Zincalume product in the middle of the year after a 20-year research and development program. It is spending $60 million to alter production lines so it can begin manufacturing the new product.
As well, a final decision is to be made by year's end on the expansion option to be pursued at its half-owned US venture, North Star Steel.
The partners are considering a $400 million program either to boost capacity or to install a direct reduction iron unit, which would help lower costs. The venture produces about 2 million tonnes of steel a year, which is well above its rated capacity of 1.5 million tonnes, with just 400 employees.
"We are seeing better activity in the US . . . but China is probably a little softer," Mr O'Malley told analysts. "There is a lot of growth in south-east Asia. We have to get our skates on to get that."
Additionally, the company has just won its first order in Russia for a prefabricated steel building, which it is to supply out of the US.
A revival of demand in China "will depend on credit easing, which is on the cards", Mr O'Malley said. "For the first time in four years we're looking at reporting a profit. We have turned the business around. The foundation is there for growth."
In the December half, earnings were flattered by a favourable $25 million workers compensation settlement along with $132 million of carbon credits, which were sold to reduce borrowings.
Frequently Asked Questions about this Article…
In the December half BlueScope reported a $12 million loss, a big improvement from a $530 million loss a year earlier. The company expects a small profit in the second half, signalling roughly a break-even result for the full year. For investors this suggests the worst of the earnings fall may be over, but future performance will depend on demand recovery and no further asset write-downs.
BlueScope shares jumped on the stronger result, closing up 58 cents at $4.35 as investors cheered the turnaround. BBY analyst Mike Harrowell noted the stock is trading below its net tangible asset (NTA) backing of $6.86 and suggested the shares could rise toward about $6 if the growth profile holds. That comment reflects investor interest in valuation versus balance sheet backing, but it depends on future earnings staying intact.
BlueScope has shifted from heavy cost cutting and job losses to focusing on increasing revenue. Management says the major restructuring is complete and the company is prioritising higher sales and implementation of new products to drive growth rather than further large scale cuts.
BlueScope plans to launch a new-generation Zincalume product mid-year after 20 years of research and development. The company is spending $60 million to modify production lines to begin manufacturing it. For investors, the launch represents a potential new revenue stream and product differentiation if market adoption is successful.
BlueScope is finalising a new Asian venture with Nippon Steel ahead of the Zincalume launch. Management is cautious about growth in China but sees sales opportunities in south‑east Asia, and the partnership is part of efforts to bed down the company's Asian expansion and capture regional demand.
BlueScope is co‑owner of North Star Steel in the US and a final decision on an expansion option is expected by year end. The partners are considering a $400 million program to either boost capacity or install a direct reduction iron unit to lower costs. North Star currently produces about 2 million tonnes of steel a year (above its rated 1.5 million tonnes) with around 400 employees.
Management says they are seeing better activity in the US, while China appears a little softer. They identify a lot of growth potential in south‑east Asia and say a revival of demand in China will depend on credit easing. BlueScope has also won its first order in Russia for a prefabricated steel building to be supplied out of the US.
Yes. December half earnings were helped by a favourable $25 million workers' compensation settlement and $132 million from selling carbon credits, proceeds that were used to reduce borrowings. These items materially improved the reported result for the period.
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