BlueScope Steel (BSL): North Star Dims

Bluescope Steel is a provider of steel materials, products, systems and technologies. It is headquartered in Australia, with operations across North America, Australia, New Zealand, the Pacific Islands and through Asia. The company's most-recognized product brands are COLORBOND and ZINCALUME steels, COLORSTEEL, BlueScope Zacs, LYSAGHT steel building products, Butler and Varco Pruden engineered buildings. No-moat BlueScope Steel recently downgraded its first-half FY24 guidance for earnings before interest and tax by 12% to $620–670 million. Earnings from its American North Star business, which accounted for circa 25% of last year's group earnings, are set to halve. BlueScope expects steel-making spreads to fall by around US$100 per metric ton. The average fiscal year-to-date steel price in the US is down 15% on FY23, and a spot price of US$700 per tonne is down a further 5% on this fiscal year's average. Despite softer steel prices and steel-making spreads in the US, BlueScope maintains its outlook for the rest of the business. This includes Australia, about 30% of FY23 group earnings, where weaker benchmark steel prices are offset by lower raw materials costs and stronger prices for BlueScope-branded products.

In our view, this reflects ongoing housing construction strength where activity is elevated, despite lower housing approvals and starts. Dwellings under construction in the June quarter 2023 of about 238,000 were down just 2.3% from the peak a year earlier, but still 27% higher than the December 2019 quarter.
We lower our FY24 group earnings forecast by 15% to $1.2 billion, and EPS by 15% to $1.82. Despite this, we maintain our $16.50 per share fair value estimate. The reduction in near-term earnings is small and offset by the time value of money. We make no changes to our FY25 or midcycle earnings forecasts or assumptions. There may be some more downside to earnings in FY25 and FY26 if the economy falters, but these forecasts are close to our mid-cycle expectations. BlueScope shares are modestly overvalued, which we see as reflecting the abnormally strong steel-making spreads and earnings of the past three years, thanks to fiscal stimulus and supply constraints. Those tailwinds, and consequently market expectations for BlueScope's earnings outlook, are abating. Should inflation persist, higher interest rates could become a meaningful headwind to economic activity and steel prices.