BlueScope Steel Limited · ASX:BSL
BlueScope Steel — Investor Presentation (June 2015)
46 slides from BlueScope Steel's investor presentation, June 2015
Slide 1: BlueScope Steel
BlueScope Steel June 2015 © Sandon Capital Pty Ltd 1
Slide 2: Important information
Important information This presentation has been prepared for use in conjunction with a verbal presentation and should be read in that context. It contains Sandon’s view on various matters and is based on publically available information only. This presentation is private and confidential and propri
Slide 3: Contents
Contents Company Description Investment Thesis – Cheapest Steel Company in the World Australian Steel Products – Mothball Steelmaking Facilities? Global Building Solutions – Does it Belong in the Portfolio? Capital Management – Address Interest Costs & Consider Buyback Western Port – Doe
Slide 4: Company Description
Company Description BlueScope Steel (BSL) is a steel manufacturing and distribution company with assets in Australia, New Zealand, Asia and North America. The company has five operating segments: Australian Steel Products – 34% FY14 EBITDA NZ & Pacific Steel Products – 19% FY14 EBITDA Buildi
Slide 5: Company Description – Global Manufacturing Footprint
Company Description – Global Manufacturing Footprint Source: BlueScope Steel © Sandon Capital Pty Ltd 5
Slide 6: Investment Thesis – Cheapest Steel Company in the World
Investment Thesis – Cheapest Steel Company in the World BSL sum-of-the-parts is worth significantly more than its current market value US listed steel companies trade on 9-12x EBIT. Applying these multiples to BSL’s 50% share in the North Star JV implies a value of A$1.1-1.4bn The Building Pro
Slide 7: Investment Thesis – Sum-of-the-Parts
Investment Thesis – Sum-of-the-Parts BSL sum-of-the-parts is worth significantly more than the current market value The table below does not ascribe any value for: 1. Potential EBITDA improvement from the rationalisation of Australian Steel Products 2. Potential value of surplus land at Western
Slide 8: Investment Thesis – Cheapest Steel Company in the World
Investment Thesis – Cheapest Steel Company in the World BSL is significantly cheaper than all other major global steel producers on a tangible asset basis and an earnings basis Given BSL’s high quality asset base, Sandon believes that the company should trade at a premium to many global peers Gl
Slide 9: Investment Thesis – Closing the Gap between Price & Value
Investment Thesis – Closing the Gap between Price & Value To close the gap between price and value, we believe there are several opportunities that management should consider and address: 1) Is further rationalisation required in the company’s Australian steel manufacturing business? • Sandon beli
Slide 10: Australian Steel Products – Description
Australian Steel Products – Description Australian Steel Products is a leading supplier of flat steel products in Australia with 70-75% market share Port Kembla Steel Works is the key manufacturing facility 2.5Mtpa mix adjusted steelmaking capacity Long term supply contracts with BHP Billito
Slide 11: Australian Steel Products – Key Earnings Drivers
Australian Steel Products – Key Earnings Drivers Selling prices Material costs – iron ore, coal, fluxes, alloys, coating materials Conversion costs Foreign exchange (A$/US$) Despatch volumes Split of domestic & export sales Product mix © Sandon Capital Pty Ltd 11
Slide 12: Australian Steel Products – Flow Chart & Capacities
Australian Steel Products – Flow Chart & Capacities Source: BlueScope © Sandon Capital Pty Ltd 12
Slide 13: Australian Steel Products – Exports are Loss Making
Australian Steel Products – Exports are Loss Making BlueScope made the difficult decision to shut the No. 6 blast furnace at Port Kembla in 2011. This decision has been justified by the subsequent increase in oversupply in the global steel industry Today, the No. 5 blast furnace is the workhorse
Slide 14: Australian Steel Products – Exports are Loss Making
Australian Steel Products – Exports are Loss Making Despite the closure of furnace No. 6, Australian Steel Products still exports a significant amount of loss-making commoditised steel Australian Steel Products Despatches (Kt) 6,000 5,000 4,000 3,000 2,000 1,000 0 2003 2004 2005 2006 2007 2008 200
Slide 15: Australian Steel Products – Auto shuts down in 2017
Australian Steel Products – Auto shuts down in 2017 With Australian automotive manufacturing set to cease in 2017, BSL will likely have to export a further ~80kt of product that is currently sold to domestic auto manufacturers Australian Steel Products Domestic Despatches by Industry Auto & transp
Slide 16: Australian Steel Products – Mothball Furnace No. 5?
Australian Steel Products – Mothball Furnace No. 5? Given loss making exports are a significant drag on profitability, Sandon believes that BlueScope should examine whether it makes sense to mothball furnace No.5 and import substrates to manufacture the company’s high margin branded metal coated a
Slide 17: Australian Steel Products – Mothball Furnace No. 5?
Australian Steel Products – Mothball Furnace No. 5? The chart below details the production costs for Australian Steel Products Conversion and overhead is a significant component of the cost of production. This is predominantly made up by labour and utility costs, an area that Australia is signif
Slide 18: Australian Steel Products – Mothball Furnace No. 5?
Australian Steel Products – Mothball Furnace No. 5? Sandon believes that unless the A$/US$ exchange rate remains consistently below 0.65, BlueScope steel production costs will remain at the high end of the global steel cost curve and profitability will be sub-optimal Therefore, we believe the co
Slide 19: Global Building Solutions – Description
Global Building Solutions – Description The Global Building Solutions business is a designer and manufacturer of engineered building systems (EBS) The segment services the low rise, non-residential construction needs of its global customers Engineering and manufacturing bases are located in As
Slide 20: Global Building Solutions – Footprint
Global Building Solutions – Footprint Source: BSL Global Building Solutions © Sandon Capital Pty Ltd 20
Slide 21: Global Building Solutions – Key Earnings Drivers
Global Building Solutions – Key Earnings Drivers Sales Volumes – largely influenced by non-residential construction in China and the US as well as construction activity in global accounts Margins – influenced by pricing of contracts, input costs and volumes Currency – The segment’s trade is la
Slide 22: Global Building Solutions – Cyclical & Volatile
Global Building Solutions – Cyclical & Volatile The earnings and return profile of the Global Building Solutions business has been cyclical and volatile Only once in twelve years of ownership has the segment delivered an acceptable return on equity Furthermore, the anaemic returns have been bo
Slide 23: Global Building Solutions – Divestment Candidate
Global Building Solutions – Divestment Candidate In an update on the division given in November 2012, management was targeting FY15 sales of A$3bn, double the sales achieved in FY12 Adjusting for the removal of the Australian Building Solutions business (moved to the Australian Steel Products se
Slide 24: Capital Management – Interest Burden too High
Capital Management – Interest Burden too High BSL’s Balance Sheet is in better shape than it has been in for many years At last balance date, the company had gross debt of A$798.4m and cash of A$390.3m resulting in net debt of A$408.1m (debt in Nippon JV is fully consolidated) Despite the sign
Slide 25: Capital Management – Interest Burden too High
Capital Management – Interest Burden too High The company has A$500m of syndicated bank facilities in Australia that were undrawn as at 31 December 2014, for which it is paying a commitment fee of 0.8%. We believe these facilities should be significantly reduced or even eliminated We would also
Slide 26: Capital Management – Dividends a Start, but More Required
Capital Management – Dividends a Start, but More Required The company re-commenced paying dividends in March 2015 (3c/share) Given the limited amount of franking credits (13c/share), significant proportion of offshore earnings and large amount of Australian tax losses there is little scope for m
Slide 27: Capital Management – Capex should be kept to a Minimum
Capital Management – Capex should be kept to a Minimum The company disclosed on its 1HFY15 result call that maintenance capex is in the order of A$230-250m This is significantly below current levels of depreciation and amortisation of ~A$330m Once the capital spending on the billet caster at N
Slide 28: Western Port – Description
Western Port – Description BlueScope owns 800 hectares of land at Hastings, 75km south east of Melbourne. The current location and land size was based on an abandoned plan to backward integrate into a blast furnace with coke ovens in order to produce steel for a now near extinct auto industry. L
Slide 29: Western Port – Significant Excess Land
Western Port – Significant Excess Land Source: BlueScope, Google Maps © Sandon Capital Pty Ltd 29
Slide 30: Western Port – Excess Land & Underutilised Plant
Western Port – Excess Land & Underutilised Plant According to the company’s Australian and NZ Investor Briefing in May 2013, metal coating line 5 has been mothballed and the cold roll mill, metal coating line 6 and the paint line are all operating on a reduced shift basis This suggests there is
Slide 31: Western Port – Excess Land & Underutilised Plant
Western Port – Excess Land & Underutilised Plant We believe there are two options the company should consider: 1. Maintain operations at Western Port, however sell off parcels of land that are not required for operations or as a buffer zone. We believe the company requires no more than 200 hectare
Slide 32: North Star JV – Description
North Star JV – Description North Star is a 50-50 JV between Cargill and BlueScope established in 1995 The JV owns a single site electric arc furnace in Ohio producing hot rolled coil Current production capacity is 2.2M tons (initial capacity was 1.6M tons) Original construction capital cost
Slide 33: North Star JV – Key Earnings Drivers
North Star JV – Key Earnings Drivers Steel ‘spread’ – the difference between the US Midwest HRC price and the cost of scrap / pig iron Cost of other inputs such as fluxes and alloys Energy costs – predominantly electricity Conversion costs Despatch volumes Foreign exchange (A$/US$) – tra
Slide 34: North Star JV – Strategically Located
North Star JV – Strategically Located The mill is located at Delta, Ohio Directly within one of the largest scrap steel surplus regions in North America The Ohio Turnpike is one mile to the north and the mill is connected to Norfolk Southern rail 90% of customers are within a 250 mile radius
Slide 35: North Star JV – Industry Leading Operating Performance
North Star JV – Industry Leading Operating Performance The strategic location of the mill and the renaissance of US manufacturing has resulted in operating rates far superior to the rest of the industry Sources: North Star JV, AISI, Steel Research Associates © Sandon Capital Pty Ltd 35
Slide 36: North Star JV – Industry Leading Margins
North Star JV – Industry Leading Margins Higher operating rates and lower transportation costs translate to operating margins superior to the recognised gold standard (Nucor) North Star JV vs Nucor Operating Margins 200 150 100 EBIT per ton 50 0 -50 -100 -150 -200 Nucor North Star JV Source: North
Slide 37: North Star JV – Significant Contributor to Profitability
North Star JV – Significant Contributor to Profitability Since listing in July 2003, the NSJV has contributed over A$1.1bn in EBIT to BSL As most of the earnings from the JV are paid out as dividends, the carrying value of North Star on BSL’s Balance Sheet is only ~A$100m 125 100 75 50 EBIT (A$m
Slide 38: North Star JV – Worth More in the Hands of Another Owner?
North Star JV – Worth More in the Hands of Another Owner? The closest listed comparables to North Star in the United States are Nucor (NUE) and Steel Dynamics (STLD) Both own mini-mills, however unlike BSL, NUE and STLD produce long steel products in addition to flat steel products These compa
Slide 39: North Star JV – Worth More in the Hands of Another Owner?
North Star JV – Worth More in the Hands of Another Owner? The >A$1bn valuation is supported by replacement cost analysis Big River Steel are currently building a 1.6Mt (short ton) mini-mill in Osceola, Arkansas for US$1.3bn. End products will be similar to that produced at North Star The capit
Slide 40: Financials – Historical
Financials – Historical Year ended June 30 (A$m) FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 Profit & Loss Revenue A$m 5,302.0 6,250.1 8,727.7 8,742.5 9,635.1 11,216.2 10,998.2 9,250.1 9,831.4 9,304.7 7,910.9 8,750.5 EBITDA A$m 881.2 1,104.5 1,855.9 1,126.8 1,373.6 1,617.8 505.6 594.
Slide 41: Financials – Balance Sheet
Financials – Balance Sheet ASSETS Current assets Balance Sheet notes: Cash Receivables 390.3 1,066.2 • The North Star JV is only carried Inventories Other current assets 1,620.4 76.6 at ~$100m in BSL accounts Total current assets 3,153.5 • The Building Products JV with Non-current assets PP&E 3,652.
Slide 42: Valuation
Valuation Share price 3.09 Shares on issue 573.6 Market Capitalisation 1,772.3 Net Debt1 297.1 EV 2,069.4 NTA 6.17 Multiples FY12 FY13 FY14 FY15E FY16E EV / Revenue 0.2x 0.3x 0.2x 0.2x 0.2x EV / EBITDA 20.9x 6.3x 4.1x 3.9x 4.0x EV / EBIT -9.2x 60.2x 10.1x 8.5x 9.3x P/E -5.1x 253.7x 15.6x 13.9x 14.7x
Slide 43: Valuation – Extremely Cheap in a Global Context
Valuation – Extremely Cheap in a Global Context Currency Mkt Cap EV Price / NTA EV / EBITDA EV / EBIT P/E US$m US$m CY14 CY15E CY16E CY14 CY15E CY16E CY14 CY15E CY16E Asia NSSMC (Nippon) JPY 26,640 46,174 1.0 8.6 7.9 7.4 17.0 15.3 13.2 14.4 11.7 10.1 JFE Holdings JPY 15,054 26,857 1.0 8.7 7.6 6.9 16
Slide 44: Indicative Annual EBIT Sensitivities
Indicative Annual EBIT Sensitivities Sensitivity Impact1 (A$m) +/- US$10 / tonne movement in average realised export HRC price +/- 28 +/- US$10 / tonne movement in coking coal costs +/- 22 +/- US$10 / tonne movement in iron ore costs at Aust. Steel Products +/- 50 +/- US$10 / tonne movement in 62% F
Slide 45: Key Business Risks
Key Business Risks Global economic activity Global steel demand and global production capacity Steel price fluctuations Raw material price fluctuations Competition from substitutes Exchange rate fluctuations – translation & operational Environmental laws and regulations, including pote
Slide 46: Sandon Capital Team
Sandon Capital Team Gabriel Radzyminski – Portfolio Manager & Analyst Gabriel established Sandon Capital in 2008 after having devised and managed a number of successful investment funds for a leading high net worth wealth management firm. Sandon Capital has successfully invested its funds on behal