Yesterday's market reaction to a 90.5% drop in the profits of BlueScope Steel Limited (ASX: BSL) was to send the Bluescope share price up by 2.32%. Yes, you read that correctly. Investors sent a strong vote of confidence in the company's strategy and ability to execute it, even after Bluescope posted a FY20 net profit after tax of $97 million, $919 million lower than in FY19.
Largely this was due to damage from the coronavirus. Specifically, a 2-month shutdown in US automakers, mandated closures throughout Asia, and the government enforced shutdown in New Zealand. The company also highlighted low steel prices, high energy costs, and a $197 million write-down of its New Zealand division.
However, the company also unveiled a lot of good news for the coming financial year, including results from current cost cutting and its plans for the future, which could bode well for the Bluescope share price moving forward.
Bluescope Steel's future
The company is well positioned for the post-covid world in a number of ways, including the swing to local supply chains. Bluescope remains focused on serving Australian markets first. However, it also has local steel production capability in the USA, Asia and New Zealand. There are a number of areas where Bluescope's managing director and CEO, Mr Mark Vassella believes the company will benefit.
First, Bluescope Steel believes that people will move away from public transport towards cars. This will drive an increased steel demand, particularly in North America where car manufacturing takes up 14% of all production.
Second, the company is likely to benefit from Australian stimulus spending. This will also apply to stimulus spending in Asia and the United States. In fact, US construction accounts for 23% of all production, while Australian construction accounts for 32% of all production.
Thirdly, Mr Vassella is on record talking about the increase in demand for housing, likely because discretionary funds previously used for travel are being used for home renovations. Moreover, he noted that this spending has increased in detached or low density housing, a core area of the company's product focus.
Additionally, the company plans to invest in its US operations to increase capacity to meet the growing demand. For instance, many high-cost legacy blast furnaces are reducing output within 215 miles of its US operations. This will leave a current deficit of 5.75 million tonnes a year, without factoring in stimulus growth.
Cost controls
Bluescope Steel also plans to exit loss-making products in New Zealand. Accordingly, this is likely to cause a large number of roles become redundant. The one-time cost here is likely to be between $30–$50 million. This will continue as the company reviews costs against carbon policy uncertainty, and excessively high electricity costs. Total group operating cash flow for the year, after capital expenditure, was $238 million. In addition, at 30 June 2020, Bluescope held $79 million net cash on the balance sheet.
Foolish takeaway
The coronavirus pandemic has hit Bluescope Steel pretty hard. Nevertheless, it stands to benefit in the post-covid world from trends such as the move away from public transport, the move towards detached housing, and government stimulus spending. Moreover, the company is spending approximately $700 million to expand its US operations. This is at a time when steel production within its immediate vicinity is reducing due to obsolete manufacturing technologies.
The current Bluescope share price gives the company a market capitalisation of $6.21 billion, and a price-to-earnings ratio of 11.3. I believe Bluescope Steel presents an interesting opportunity for steady share price growth over the next 2–3 years.
