Growth pause leaves a bitter taste for BlueScope investors
The stock was smacked down by 16 per cent, ignoring the company's guidance that improvements would flow through to earnings in the second half of the 2014 financial year.
The market was expecting the combination of a weaker Australian dollar, some traction of anti-dumping regulations and cost cutting to start to kick in during the first half of financial year 2014. But O'Malley chose to err on the side of safety. In doing so he left shareholders with an unpleasant taste.
The full year 2013 was a major breakthrough in a multi-year turnaround, but this had been expected and was already factored into the share price.
The healthier balance sheet had been given a tick and the successful negotiation of the coated products joint venture with Nippon Steel & Sumitomo Metal and the proceeds from the deal was also old news.
The trouble is investors wanted earnings momentum to continue in 2014, rather than take a six-month growth pause.
BlueScope will receive a nice kick from the falling Australian dollar but there is a three- to four-month lead time between the movements and the flow-through effect.
Having said that, the earnings briefing provided a blunt reminder that the troubles facing the industry are not just currency-related.
BlueScope should be recognised and commended for undertaking its life-saving restructuring a few years ago. But mounting a war on its antiquated cost base doesn't solve all the problems of a lacklustre economy and sluggish demand.
O'Malley reckons that if one strips away the performance of six major Australian companies (Rio Tinto, BHP and the four big banks), the local economy is in recession.
BlueScope charts a softening in Australian domestic volume from all its customer sectors, including house and non-dwelling construction, agriculture, mining, infrastructure and transport.
The overall improvement in the results was mostly about turning the Coated & Industrial Products Australia (CIPA) unit from an underlying loss in 2012 (of about $150 million) to a profit of $150 million.
This was a story about decreasing loss-making exports, getting some better prices (thanks to lower raw material costs) and successful fortification of the regulatory guard (the Anti-Dumping Commission) which reduced the competition from cheap steel product landing in Australia.
Given CIPA was the company's earnings basket case, it's the turnaround that's provided the most leverage to improve the overall performance. But to achieve the next leg up, BlueScope will need the dollar to remain low and an improvement in construction activity.
Frequently Asked Questions about this Article…
BlueScope’s reported earnings broadly matched analyst forecasts, but CEO Paul O’Malley’s outlook was noticeably more cautious than the market expected. Investors had been banking on continued earnings momentum in 2014, so the company signalling a six‑month growth pause triggered a sharp 16% share price fall despite the underlying numbers.
BlueScope guided that improvements should flow through to earnings in the second half of the 2014 financial year. The company also noted that benefits from a weaker Australian dollar typically have a three‑ to four‑month lead time before they feed into results.
A falling Australian dollar is positive for BlueScope because it improves competitiveness and margins on exports and local pricing. However, the article highlights a 3–4 month lag between currency moves and the company actually realising those earnings benefits, so currency is helpful but not an immediate fix.
Most of the improvement came from the Coated & Industrial Products Australia (CIPA) unit, which swung from an underlying loss of about $150 million in 2012 to a profit of about $150 million. That turnaround was driven by fewer loss‑making exports, better prices supported by lower raw material costs, and regulatory protection from the Anti‑Dumping Commission.
The coated products joint venture with Nippon Steel & Sumitomo Metal was a successful strategic move for BlueScope. The deal and the proceeds from it had already been factored into the share price, so while it strengthened the balance sheet, it wasn’t new positive news for investors at the time of the update.
BlueScope warned that its domestic volumes are softening across multiple customer sectors — including housing, non‑dwelling construction, agriculture, mining, infrastructure and transport. Management also noted that cost cutting alone won’t fix problems caused by a lacklustre economy and sluggish demand.
Yes. While a sustained low Australian dollar helps, BlueScope will also need an improvement in construction activity and broader demand to drive the next leg up in earnings. The company’s turnaround has improved resilience, but stronger end‑market demand is still required for sustainable growth.
A six‑month growth pause disappointed investors who were expecting continuous momentum, which is why the share price reacted strongly. Whether to be worried depends on your investment horizon: the company has made structural improvements and its CIPA turnaround is encouraging, but near‑term earnings are exposed to currency timing and weak domestic demand as described in the company’s briefing.
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