The BlueScope Steel Limited (ASX: BSL) share price is getting a boost from a broker upgrade this morning.
The steel products manufacturer’s share price jumped 1.8% at the time of writing to $22.53. In contrast, the S&P/ASX 200 Index (Index:^AXJO) is struggling at around breakeven.
The outperformance of the BlueScope share price coincides with Macquarie Group Ltd’s (ASX: MQG) decision to lift its rating on the shares to “outperform” from “neutral”.
Good spreads drive BlueScope share price upgrade
The broker’s bullish turn comes as its analysts took a more upbeat view on steels spreads, or margins.
“Our Macro Strategy team has upgraded the outlook for the steel complex,” said Macquarie.
“Spread expectations expand, especially in 1HFY22 in the US, driving earnings upgrades. The team still expect a roll-over in prices when IP [industrial production] slows, but reduced China export suggests structurally better margins.”
Positive outlook for US steel
Steel in the US have continued to rally and the benchmark prices are trading more than US$200 a ton above their levels on 27 April. That was when BlueScope last provided guidance for the second half of FY21.
Macquarie believes that steel prices will hold on to these gains into the September quarter. But prices are then expected to moderate along a more benign curve than previously expected.
Lumber shortage gives boost in Australia
Meanwhile, the outlook for Australian steel prices also remain constructive thanks to the booming housing market.
“Builders continue to report solid demand even after HomeBuilder, which should support broad demand,” said Macquarie.
“Lumber shortages are also playing into steel demand – although BSL would also likely be constrained for capacity in this niche product.”
Cashed up to capitalise on opportunities
BlueScope’s growing cash pile will give management options too. While the company is still running an on-market share buyback program, Macquarie thinks it will be hesitant to purchase shares at current prices.
If so, this will give BlueScope the flexibility to undertake other forms of capital return or even use its cash balance to make a bolt-on acquisition, in my view.
What is the BlueScope share price worth?
“While we remain vigilant that falling steel prices could impact the stock – and present the most significant risk to our view – we think EPS momentum is likely to remain very strong in the near term,” added Macquarie.
“Underpinned by a revised house view on the steel complex and valuation that remains attractive (NTM EV/EBIT at 12% discount to 5-year avg), there is a better risk-reward balance now.”
Macquarie’s 12-month price target on the BlueScope share price is $25.50 a share.