The BlueScope Steel Limited (ASX: BSL) share price was down as much as 10% in early trade this morning despite announcing a full year profit of just over $1 billion.
BlueScope was born out of a 2002 demerger from BHP Billiton, now known as BHP Group Ltd (ASX: BHP). Initially BHP Steel, it was renamed BlueScope Steel in November 2003. The company is the third largest manufacturer of painted and coated steel products globally.
BlueScope FY19 Results
Today, the company has reported a 35% fall in net profit after tax (NPAT) of $1.016 million. However, underlying profit was up 17% to $966.3 million. The large discrepancy in the two metrics was due to large one-off benefits in the previous financial year.
BlueScope is in a strong financial position with net cash of $692.7 million. The company’s stated target in recent times has been for a net cash position of $200 to $400 million. However, with consistently strong earnings and cash flow the past couple of years, management have reassessed their optimal capital structure and will now target net debt of around zero going forward.
BlueScope announced a buyback of company shares towards the end of the financial year and plans to buy back up to $250 million of company shares in the first half of the 2020 financial year (FY20). The company also declared a final unfranked dividend of $0.08 per share. This brings the full year dividend to $0.14, placing BlueScope on a miserly dividend yield of 1.1%.
North Star Expansion
The company has announced that it plans to add around another 850,000 metric tonnes per annum of domestic steel-making capacity in the U.S via an expansion of its North Star mill in Ohio. With an estimated cost of US$700 million, commissioning of the expansion is expected in mid FY22 with full ramp-up approximately 18 months later.
Commenting on the expansion plans, CEO Mark Vassella said, “North Star is recognised as a best-in-class asset. Based on long term historical spreads, this project is expected to deliver compelling return on invested capital of 15% or more, once fully ramped-up.”
He later added, “This project fits our strategy perfectly. It offers long term sustainable earnings growth from a high quality asset.”
Near-Term Outlook
The company expects weaker commodity steel spreads to negatively impact on performance in the short term. As a result, the company has said it expects underlying EBIT in the current half year to be around 45% lower than the most recently concluded half. This weaker outlook, albeit very short term, may have been a catalyst for the sell off this morning.
Would I Buy Shares Today?
Typically, I steer clear of companies that are in the business of selling commodity products. These companies are price takers by necessity and as a result, are largely hostage to the market price of their particular commodity. With limited control over their own destiny, the success of the company and by extension your investment, is driven more by luck than by skill.
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At the time of publishing, Luke has no financial interest in any companies mentioned.
