Debottlenecking Projects And New Products Will Strengthen Market Position By 2030

Key Takeaways

• Cost and productivity programs and strategic projects are set to enhance margins, EBIT growth, and significant future earnings potential.
  
• Dividends, share buybacks, and new capacity investments reflect strong earnings outlook and management's confidence in sustained growth.
  
• Economic challenges and high costs threaten BlueScope's revenue, margins, and future growth, with cautious capital allocation and reliance on land holding strategies.

Catalysts

Engages in the production and marketing of metal coated and painted steel building products in Australia, New Zealand, Asia, North America, and internationally.

• BlueScope is targeting a $200 million cost and productivity improvement program across its segments by FY '26, which is expected to enhance net margins and drive EBIT growth once fully realized by 2026.
  
• The company plans to generate $500 million in incremental annual EBIT by 2030 through various growth opportunities, including debottlenecking projects in North America and new product launches which should significantly boost earnings.
  
• BlueScope is positioned to benefit from improving steel spreads in the U.S. and a strategic land development opportunity in Australia that could generate significant cash flow, enhancing revenue and EBIT.
  
• An increase in annualized dividends and share buybacks indicates management's confidence in sustaining strong earnings and cash flows, which may impact EPS positively.
  
• The planned MCL7 coating line in Australia will increase capacity, supporting revenue growth from increased domestic volume in value-added steel products through 2030.

BlueScope Steel Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BlueScope Steel's revenue will grow by 3.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.3% today to 5.1% in 3 years time.
• Analysts expect earnings to reach A$927.3 million (and earnings per share of A$2.22) by about March 2028, up from A$541.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$1.1 billion in earnings, and the most bearish expecting A$649 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.5x on those 2028 earnings, down from 18.4x today. This future PE is greater than the current PE for the AU Metals and Mining industry at 11.7x.
• Analysts expect the number of shares outstanding to decline by 1.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.47%, as per the Simply Wall St company report.

BlueScope Steel Future Earnings Per Share Growth

Risks

• The challenging macroeconomic environment, with bottom-of-the-cycle Asian steel spreads and weaker North American benchmark spreads, could impact BlueScope's revenue and net margins.
  
• High electricity, gas, and labor costs in the Australian manufacturing environment present ongoing challenges, potentially impacting net earnings if cost efficiencies are not realized.
  
• Weak economic and market conditions in New Zealand have contributed to a significantly lower performance, which could negatively affect revenue and profitability if conditions persist.
  
• The deferral of the U.S. midstream investment reflects caution and potential risk in capital allocation, impacting potential future earnings growth.
  
• The plan to extract value from their land holdings could face delays in realization, affecting projected incremental EBIT growth and cash flow targets.

Valuation

• The analysts have a consensus price target of A$25.617 for BlueScope Steel based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$28.7, and the most bearish reporting a price target of just A$20.7.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$18.2 billion, earnings will come to A$927.3 million, and it would be trading on a PE ratio of 14.5x, assuming you use a discount rate of 7.5%.
• Given the current share price of A$22.75, the analyst price target of A$25.62 is 11.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.