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BlueScope’s earnings to halve as it takes $200m write-down

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The BlueScope Steel Limited (ASX: BSL) share price fell this morning after management forecasted earnings to more than halve and a circa $200 million write-down.

Shares in the steel products maker slipped 0.6% to $11.32 when the S&P/ASX 200 Index (Index:^AXJO) gained 0.2% at the time of writing.

But it may not be its earnings guidance or the large provisioning that’s knocking the wind out of the BlueScope share price.

Earnings weakness not the main drag

Management expects underlying earnings before interest and tax (EBIT) to come in around $560 million for FY20 with $260 million of this attributed to the COVID-19 affected June half. This compares to the $1.4 billion it posted in FY19.

That’s actually not too bad given the economic hit from the coronavirus pandemic on countries that the group operates in.

Further, analysts were expecting the last financial year to be weak anyhow. For instance, Credit Suisse pencilled in a net profit of $318.7 million for FY20 when BlueScope reported an underlying net profit of $966.3 million in FY19.

Write-down is no surprise

I doubt anyone would be surprised by the write-down of its underperforming businesses too when so many others are doing the same. Woodside Petroleum Limited (ASX: WPL) and Origin Energy Ltd (ASX: ORG) are but to recent examples.

I believe it’s the sombre outlook that’s weighing on the stock instead.

Uncertain outlook

Management warned that steel spreads in North America and Asia have weakened since the start of this financial year compared to the average achieved in the 2HFY20.

“Further, while at this point orders and despatches in Australia remain stable and North Star is despatching near full capacity, there is a high level of uncertainty in the current environment,” said BlueScope in its ASX statement.

This isn’t only due to COVID-19 directly impacting on demand, supply chains and operations, but the broader economic fallout that’s expected to dampen demand for its products.

Management said it will provide more details on trading conditions when it releases its full year results on 17 August.

Shiny side to BlueScope’s results

On the bright side, the $100 million that BlueScope’s holding on its balance sheet should provide it enough firepower to get through the turmoil.

Its US North Star business is also performing better than expected with utilisation rates staying above 90% through the second half of FY20. This is despite the shutdown of key industries like automobile from mid-March to mid-May.

BlueScope’s Building Products Asia & North America is also surprisingly resilient with its second half result coming in at around the same as the first half.

I think the stock is cheap despite the uncertain outlook. Having said that, I don’t think the BlueScope share price will be going anywhere till management provides a further update in a month’s time.

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Returns as of 6th October 2020

Motley Fool contributor Brendon Lau owns shares of BlueScope Steel Limited. 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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