Bluescope Steel: Down, but not out
Bluescope Steel (BSL) was one of those companies that suffered particularly badly during the GFC. After reaching an all-time high of approximately $74 in 2008, the share price plunged in 2009 to between $10 and $20 a share. In the subsequent years it failed to recover in the way that the general market has. From its inception, as a result of a demerger of BHP Billiton's steel assets until 2009, BSL rode high on China's economic expansion and its strong demand for steel and the share price increased strongly. Although the share price dropped savagely in 2009, the business fundamentals for BSL didn't bottom until a few years later. Increased competition from Chinese steel mills made it extremely difficult to compete in the sector. These Chinese mills are currently oversupplying the market with steel and to put the oversupply into perspective, the Chinese excess capacity of 120 million tonnes is more than the entire output from the United States. BSL posted its biggest net losses in 2011 and 2012, which was reflected in the share price, reaching lows around $1.50 during this time. The recovery finally started in 2013 and in 2015 BSL returned a slightly positive net profit margin on revenue that was down only approximately 18% from the 2008 peak. This history should be taken into account when viewing the 2016 annual result announced by BSL today.
EBIT for the second half came in at $340m, exactly equal to the guidance provided a month ago, which produced a full year underlying EBIT of $570m on total revenue of $9.2bn. While revenue was only 7% higher than the previous year, underlying EBIT was 89% higher, indicating significant improvement to profit margins. Specifically, the EBIT margin has increased to 6.2% from 3.5% the prior year. The net profit margin has also increased from 1.6% to 3.8%. Amazingly, this result comes in spite of lower global steel prices. Despite the strong result, the total dividend payments of $0.06 is unchanged from the prior year, perhaps due to the fact that BSL is trying to reduce its net debt position. Since the beginning of this year, net debt has been reduced from approximately $1.4bn to $0.8bn as the company tries to get its leverage (net debt/underlying EBITDA) down to 1.0x. Cash flow from operating activities was helped by the fact that taxes paid were relatively small due to significant carry forward tax losses. Due to BSL's weak performance a couple of years ago, the company has $2.75bn in tax losses that can be used to offset future Australian taxable income.
Detailed guidance for FY 17 has been released. Underlying EBIT for the first half of FY17 is expected to be 50% higher than that for second half FY16 after making a few assumptions about steel prices and the AUD/USD exchange rate. This guidance confirms that the exceptionally strong EBIT growth is set to continue.
The significantly increased margins come as a result of aggressive cost cutting measures at BSL. After doing the hard work, BSL is now reaping the rewards. One impressive figure in the report highlights the fact that compounded EBIT growth over the last three years is above 90%. This level of EBIT growth is being directly reflected in the share price. The Rivkin Local Momentum strategy added BSL to the portfolio on 15 June this year and since then the price has increased by 40%. The design of the portfolio is such that stocks whose share prices have been performing well will remain in the portfolio. Once the upward momentum abates, the position will be sold and the profits realised. Anyone interested in learning more about the Rivkin Local Momentum strategy should click here or contact the Rivkin team on 02 8302 3600.
This article was written by William O'Loughlin – Local Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via firstname.lastname@example.org or by phoning +612 8302 3600.