North Star Project Will Increase Capacity By 10%, Reduce Emissions, And Strengthen Future Operations

Key Takeaways

• Strategic domestic product shift and U.S. investment aim to boost revenue and enhance profitability through value-added sales and integration.
  
• Advanced low emissions initiatives and land portfolio development focus on sustainable growth and new revenue streams.
  
• Volatile steel spreads, inflation, and market challenges threaten BlueScope's revenue, profitability, cash flow, and earnings stability across key regions.

Catalysts

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

• The North Star debottlenecking project, once completed by FY '28, is expected to increase capacity by 10%, enhancing revenue and the earnings potential from the U.S. mini-mill by capitalizing on robust steel spreads in the U.S. market.
  
• The shift towards domestic value-added products, including COLORBOND, is expected to improve net margins by moving sales up the margin curve, thus enhancing profitability even in a soft pricing environment.
  
• Implementation of advanced low emissions technology and infrastructure projects in New Zealand and Australia, such as the new electric arc furnace, will contribute to sustainable growth and long-term earnings resilience by reducing emission intensity, potentially unlocking value in an evolving regulatory environment centered around decarbonization.
  
• Strategic focus on leveraging the 1,200-hectare land portfolio for new industrial and residential developments in Australia and New Zealand is expected to generate additional revenue streams and improve earnings.
  
• The proposed midstream investment in the U.S., aimed at integrating North Star's output with downstream operations, including pickling and metal coating capacity, is anticipated to capture through-chain margins and drive revenue growth in the U.S. steel market.

BlueScope Steel Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BlueScope Steel's revenue will decrease by 0.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.7% today to 4.9% in 3 years time.
• Analysts expect earnings to reach A$850.6 million (and earnings per share of A$1.99) by about February 2028, up from A$804.7 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$562 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.8x on those 2028 earnings, up from 11.7x today. This future PE is greater than the current PE for the AU Metals and Mining industry at 13.7x.
• Analysts expect the number of shares outstanding to decline by 1.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.14%, as per the Simply Wall St company report.

BlueScope Steel Future Earnings Per Share Growth

Risks

• The volatility in Asian steel spreads and soft macroeconomic conditions in regions like New Zealand could continue to pressure BlueScope’s steelmaking operations and reduce revenue potential.
  
• Inflationary pressures, particularly in Australia with higher electricity costs, could eat into BlueScope’s net margins and overall profitability.
  
• The timing of property and asset sales being delayed, as seen with the BlueScope Properties Group, may affect cash flow and earnings.
  
• Challenges in the North American BCP business, such as low utilization and reduced volumes from foundational customers, could hinder earnings growth expectations.
  
• Ongoing competitive and economic uncertainties in key markets, including the U.S. and China, may impact demand and pricing power, thus affecting BlueScope’s revenue and earnings stability.

Valuation

• The analysts have a consensus price target of A$22.708 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$26.7, and the most bearish reporting a price target of just A$18.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$17.4 billion, earnings will come to A$850.6 million, and it would be trading on a PE ratio of 13.8x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of A$21.51, the analyst price target of A$22.71 is 5.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.