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Why the BlueScope Steel Limited share price is surging today

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Shares in steel manufacturer BlueScope Steel Limited (ASX: BSL) have rallied around 4% in the first hour of trade on Monday after the company reported a huge increase in profit.

For the 12 months ending June 30 2016 underlying net profit after tax rose 119% to $293 million thanks to a combination of sales growth, cost reductions and the benefit of the Northern Star acquisition.

Underlying earnings per share leapt 115% to 51.4 cents per share (cps).

A dividend of 3 cps has been declared. BlueScope’s shares will trade ex-dividend on September 9, with payment made on October 10.

The vastly improved profitability of BlueScope hasn’t been lost on investors with the shares up around 150% in the past 12 months. In contrast, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is up approximately 6%.

Helping improve investor confidence in the stock has been a major reduction in debt levels. Over the past year, net debt declined by $595 million to $778 million.

At the same time, investors have come to understand that management is successfully implementing its strategic priorities to turn around the group.

In the coated and painted products division, BlueScope has now delivered a 31% per annum compound return in earnings over the past four years with management stating that it plans to further grow the business in Asia via a third metal coating line with an in-line painting facility in Thailand.

Meanwhile, the buildings division saw a dramatic year-on-year improvement in profitability. Earnings before interest and tax (EBIT) increased from $8 million to $40 million. Management singled out China as a focus for growth.

Finally, BlueScope’s North Star business is now a wholly owned subsidiary after buying out its joint venture partner Cargill. The division reported earnings growth of 37% to $146.5 million.

Outlook

Perhaps most pleasing of all for shareholders in BlueScope and also the most important factor for valuing the stock is the positive outlook statement provided by the company.

Here’s what was said:

“We expect 1H FY2017 underlying EBIT to be around 50% higher than the 2H FY2016 which was $340.4 million.”

This forecast implies a significant profit uplift. Possibly enough that means there could be further share price upside ahead.

Interestingly, for a long time investors were better off selling shares in BlueScope than buying them! It goes to show that the fortunes of many companies ebb and flow...

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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