Shares in BlueScope Steel Limited (ASX: BSL) surged to an eight-month high after management reported a profit upgrade and made an earnings accretive acquisition.
The stock jumped 19.2% to $4.85 in early trade and analysts will be rushing to upgrade their earnings forecasts for the steel maker, which has struck a deal with unions and the New South Wales government to keep its Port Kembla plant in operation that will deliver over $200 million in operational savings by 2016-17.
The deal means that BlueScope's earnings for the six months to end December this year will be around 40% higher than the previous six months and $50 million above management's previous guidance.
The company's new enterprise agreement with the unions will see it save $60 million a year in labour costs, while the NSW state government's decision to defer $60 million in payroll tax payment over the next three years also contributed to the positive outcome.
But the upgrade isn't only driven by these factors. The lower Australian dollar compared to the US currency, growth in domestic demand particularly from residential construction and earlier-than-expected cost reductions are also supporting earnings.
The earnings upgrade doesn't take into account BlueScope's move to buy the 50% stake in its North Star joint venture from Cargill for $US720 million.
The acquisition is priced at 7.1x 2014-15 earnings before interest, tax, depreciation and amortisation (EBITDA) and implies a pro-forma 2014-15 cash flow per share accretion of 26%.
North Star operates a mini-mill in Ohio that produces two million tonnes a year of hot rolled coil and has been a profitable venture for BlueScope.
BlueScope has received over $1.1 billion in cash dividends for its 50% stake in North Star since 2004-05 and the deal will be funded from US capital market issuance and longer-term bank debt.
Analysts polled on Reuters are expecting BlueScope to post a 20%-25% decline in net profit but this seems to be too pessimistic in light of today's update.
However, it isn't all good news. BlueScope's second half is not expected to be as good as the current half as steel prices are likely to fall as there's no letup in the flood of supply from China.
Nonetheless, the latest update from management is great news for shareholders although until we see a rebound in steel prices, BlueScope is only a suitable investment for those with nerves of steel.
