Broker thinks BlueScope Steel Limited could announce a profit upgrade

Steel products maker BlueScope Steel Limited (ASX: BSL) may be one of our best performing stocks on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) but it probably has more room to climb as not all the good news is reflected in its share price.

This is despite the stock surging 41.6% over the past 12 months as it added another 3.5% to $16.10 in late afternoon trade today. In contrast, the top 200 stock index is barely in the black in the past year.

What this also means is that BlueScope may have to upgrade its profit guidance pretty soon, according to UBS.

The broker noted a surge in the spread between steel prices in the US and elsewhere after US President Donald Trump imposed steel import tariffs on most of the world.

“Steel spreads in the US are surging. We continue to see strong commercial and industrial demand in the US, with a view that we could be at the start of a long-term infrastructure up-cycle,” said UBS.

“However, with spreads at US$500/t, a level not seen in perhaps 8-10 years, investor hesitation and pre-emption of a pullback is likely to lift in coming months.”

With UBS tipping that the multi-year highs in steel spreads will be sustained, BlueScope’s FY18 earnings guidance is starting to look way too conservative as it has assumed a spread of just US$325 a tonne.

Around a third of BlueScope’s earnings comes from its US-based North Star operations.

But even if the spreads were to narrow, there is still good upside in the stock as the broker’s bullish call on BlueScope is not premised on US steel spreads but the overlooked growth opportunity in Asia.

What’s more, BlueScope continues to trade at a meaningful discount even with the strong share price run as the stock is on a compelling 5.9 times FY18 enterprise value to earnings before interest, tax, depreciation and amortisation (EV/EBITDA) multiple when its global peers are trading at a 6.5 times multiple.

The bullish outlook for steel also bodes well for iron ore producers like BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO).

The price of iron ore has fallen by around 19% since February but I think it will start to find support as the winter construction season picks up. After all, China’s infrastructure building plans are more ambitious than the US.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, BlueScope Steel Limited, and Rio Tinto Ltd. 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 Scott Phillips.

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