Shares in Australian steel giant Bluescope Steel Ltd (ASX: BSL) are rangebound on Tuesday, trading up just 0.14% at $20.96 at the time of writing.
It's been an interesting couple of months for Bluescope shareholders who've watched prices zigzag to trade roughly flat in that time.
With steel prices coming off a period of weakness, recently reversing course after bottoming in December, there may be some welcomed relief for ASX steel producers.
Despite volatility in the spot markets for steel, the team at one leading investment bank has been overweight on Bluescope shares since January 2019 — and hasn't budged since. Let's take a closer look.
What's the go with Bluescope shares lately?
It was a difficult time for Bluescope investors in November. Shares closed the month relatively flat after testing the $22 mark on several occasions but failing to break it each time.
A bottom-heavy steel market that softened steel prices, plus weakening demand for steel out of China, has played havoc on steel producers in 2021.
This comes after steel surpassed multi-year highs and rewarded producers with record free cash flow and tidy profit margins in 2020-2021.
However, with the price volatility, Blusecope hasn't had the opportunity to reclaim losses sustained earlier in the year.
So why's JP Morgan bullish on Bluescope shares?
The team at JP Morgan rate Bluescope overweight based on its attractive valuation metrics, strong balance sheet, strong focus on shareholder returns, and asset quality.
It values Bluescope at $33 per share – well ahead of many other analysts. At the time of writing, this implies an upside potential of 58%.
Aside from this, the broker is attracted to Bluescope's dominant market position in Australia, along with the "consistent cash flow from the North Star assets".
"Over time", JP Morgan says, "we expect the company to grow domestic volumes in Australia, which should improve margins, while the North Star expansion also offers potential growth".
Regarding its view on the dynamics of steel pricing, it notes prices for hot-rolled coil steel (HRC) in the US and East Asia are still "very strong" and remain elevated on a year to date basis.
In addition, US steel capacity utilisation is still high and supported by robust demand, the broker says.
Regarding its outlook for steel, it notes that "forward curves point to lower prices in 2022/23, although Chinese steel exports are sequentially lower and could provide some upside price pressure if they continue to trend lower".
The broker also sheds some colour on its expectations for the company, stating it forecasts "an FY22 EBIT [earnings before interest and taxes] of $4.2 billion, which is 14% above consensus".
It reiterated its overweight rating on the back of "valuation support, solid FCF yield estimates of 24% in FY23, strong balance sheet with a net cash position and capital management prospects (buyback program likely to be topped up)".
It's been more than a volatile 12 months for Bluescope shareholders. Shares have gained almost 19% in that time, rallying just over 19% this year to date as well.
In the past month, the Bluescope Steel share price has been catching bids and has gained around 200 basis points.
