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BlueScope's strong first half unsustainable, warns Morningstar

Emma Rapaport with AAP  |  27 Feb 2019Text size  Decrease  Increase  |  
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BlueScope Steel may have posted a record first-half result, but it will be hard to sustain the momentum, warns Morningstar analyst Mathew Hodge.

The steelmaker has posted a 42 per cent rise in profit, from $441.2 million a year earlier, while underlying earnings before interest and tax have jumped 62 per cent to a record $849.6 million despite higher costs.

This was helped by a 17 per cent increase in revenue to $6.4 billion.

BlueScope (ASX: BSL) beat the EBIT guidance of $830 million given in November. The company share price closed up 1.83 per cent yesterday at $13.37 – overvalued against its Morningstar fair value estimate of $8.70.

"It's an excellent result, our best half on record," managing director and chief executive Mark Vassella said following Monday’s result. "It was driven by strong demand and steel spreads in our US and Australasian markets."

Morningstar equity analyst Matthew Hodge say the result tracked his expectations, driven higher by stronger steel prices and a weaker Australian dollar.

Hodge said BlueScope’s North Star delivered record earnings on strong US steelmaking spreads that improved to $524 per tonne in the first half.

"Midwest hot rolled coil prices were their highest in a decade, benefiting from Donald Trump’s steel tariffs announced in March 2018," he said.

"Segment margins soared to 29.8 per cent, up from 16.8 per cent a year earlier."

The Australian Steel Products segment also benefitted from elevated steel prices, Hodge says.

Australian residential construction is at cyclical highs, and Hodge says the sales mix during the period remains favourable.
Bluescope's Vassella confirmed full-year results are expected to improve for a third straight year.

BlueScope flagged a 10 per cent increase to full-year earnings before interest and tax, which last year came in at $1.269 billion.

Hodge expects the second half to be softer, describing the stronger steel prices in Australasia and North America as "unsustainable".

With steel pricing now moderating, he forecast North Star’s full-year steelmaking spread at $USD415 per tonne and continues to expect full-year earnings before interest and tax of $722 million.

Hodge's full-year underlying earnings before interest and tax forecast of $1,312 million is unchanged.

The board declared a flat unfranked interim dividend of 6 cents.

. Emma Rapaport is a reporter for Morningstar Australia.

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