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Is Bluescope a Steal?

Share markets regularly throw up head scratchers. Here’s the latest. Bluescope Steel (BSL) reported a 102% increase in profit on Monday. The shares were promptly sold down more than 23%. What gives?

There are a couple of contributing factors. The picture of 2018 painted by management was *ahem* cautious. They may have good reason to spell out potential hurdles. In results commentary that appeared aimed directly at Canberra, BSL’s management warned on energy costs and steel dumping. The result was guidance for a coming circa 18% drop in half year earnings.

While appeals for government welfare are generally perceived as odious the company laid bare the consequences of restrictions in gas exports and government interference in electricity markets. A 75% increase in energy costs in two years will cause any investor to pause. The call that 2018 sales are constrained by potential steel dumping is harder to sustain. The reality is that businesses that were tariff protected for decades to the cost of the Australian taxpayer get fairly short thrift when they complain about international competition.

The company also announced a change of CEO, and the launch of ACCC action relating to alleged cartel behaviour in 2013 and 2014. The overwhelming consideration for BSL over the coming years is the health of the global economy and therefore the steel industry. While both regulation and succession must be taken seriously, neither of these issues looks economically material at this stage.

The chart above shows how dramatically BSL was sold off. Importantly it reached the persistent support around $11, and held. This may mean that the low on Monday is as bad as it gets. A quick back of the envelope calculation suggests BSL is now trading on 13-14x, a discount to the market PE above 16x. I’m not a fan of the steel industry in Australia for long term investment. However in my opinion on a one year view BSL looks cheap at current prices.

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