BlueScope Steel: Profit Downgrade on Lower Steel Prices
No-moat BlueScope Steel BSL has downgraded first-half fiscal 2024 EBIT guidance by about 12% to AUD 620 million-AUD 670 million. Earnings from North Star, about 25% of last year’s group EBIT, are set to halve. BlueScope expects steel-making spreads to fall by around USD 100 per metric ton. The average fiscal year-to-date steel price in the U.S. is down about 15% on fiscal 2023, and a spot of about USD 700 per metric ton is down a further 5% on this fiscal year’s average.
Despite softer steel prices and steel-making spreads, BlueScope maintains its outlook for the rest of the business. This includes Australia—about 30% of fiscal 2023 group EBIT—where lower benchmark steel prices are offset by lower raw materials costs and stronger prices for BlueScope branded product. We think this reflects the ongoing housing construction strength where activity is elevated, despite lower 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 fiscal 2024 EBIT forecast by 15% to AUD 1.2 billion, and earnings by 15% to AUD 1.82 per share. Despite this, we maintain our AUD 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 fiscal 2025 or midcycle earnings forecasts or assumptions. There may be a bit more downside to earnings in fiscal 2025 and 2026 if the economy falters, but these forecasts are close to our midcycle expectations. BlueScope shares are modestly overvalued, which we think reflects 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.
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