The BlueScope Steel Limited (ASX: BSL) share price is buckling after it posted its full year profit and issued an uninspiring outlook for FY20.
The announcement from the steel maker is one of the most hotly anticipated releases on Monday as worries about US steel spreads and global demand for the construction material have made the stock a bumpy ride over the past year.
Shareholders who've hang on will be disappointed. The BlueScope share price crashed 10.3% to $10.95 in early trade – making it the worst performer on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.
It'll probably finish in the same dubious position given how far it's lagging behind the Abacus Property Group (ASX: ABP) share price and Lynas Corporation Ltd (ASX: LYC) share price, which are the second and third biggest laggards on the top 200 index.
Earnings growth overshadowed by weak outlook
While BlueScope announced a 6% increase in underlying earnings before interest and tax (EBIT) to $1.35 billion and reported a record result for its US North Star business as its underlying EBIT surged 52%, investors were spooked by the drop in all other parts of its business and management's warning of more pain in the current financial year.
Contrary to what I was expecting, there's no light at the end of BlueScope's tunnel with management expecting weaker steel spreads for North Star and its Australian Steel Products.
This means underlying EBIT in the first half of FY20 will be 45% below the $499 million the group delivered in 2HFY19.
Comforting words about the resilience of its global operations, strong balance sheet and high-quality assets didn't count for much.
North Star's $1 billion expansion given the green light
The decision to push the start button on the US$700 million ($1.03 billion) expansion of North Star also couldn't win over sceptics either.
The big investment probably means no new capital return to shareholders and it will drain its large net cash position of $693 million.
The expansion will add 850,000 metric tonnes of steel making capacity to Ohio plant with commissioning expected in mid FY22 and full ramp-up to follow 18 months after.
"North Star is recognised as a best-in-class asset. Based on long-term historical spreads, this project is expected to deliver compelling ROIC of 15 per cent or more, once fully ramped-up," said BlueScope's chief executive Mark Vassella.
"Moreover, the project has future potential growth, through possible debottlenecking to add a further 500,000 metric tonnes per annum of steelmaking capacity."
North Star will make BlueScope a dominant US steel products supplier in the world's biggest economy and the capex probably makes strategic sense (15% ROIC isn't bad given that rates will be stuck around zero for a few years), but investors will need to overcome the near-term pain before we see the stock recover.
