Sandon BSL AU Presentation
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Transcript of Sandon BSL AU Presentation
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BlueScope Steel
June 2015
Private and confidential
Sandon Capital Pty Ltd
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Important information
This presentation has been prepared for use in conjunction with a verbal presentation and should be read in that context. It contains Sandons view on various matters and is based on publically available information only.
This presentation is private and confidential and proprietary to Sandon Capital Pty Ltd (Sandon Capital) and may not be disclosed to any third party or used without the prior written consent of Sandon Capital.
This presentation has been prepared by Sandon Capital for general information purposes only. The presentation is not a recommendation, offer or invitation by any person or to any person to sell or apply for securities or interests in a trust. This presentation does not constitute financial advice. You should not rely on the information or views contained in this presentation.
Nothing in this presentation takes into account any persons investment objectives, financial situation or particular needs. You should seek advice before making any investment decision. If you do not have an adviser, we can put you in touch with someone who can help.
Any forward looking statements, in Sandons view, are based on reasonable grounds but future events cannot be predicted. The past is generally an unreliable indication of the future. Any quoted performance is post fees and expenses but before tax and assumes distributions were reinvested, unless otherwise stated. Dollars are AUD, unless otherwise stated. We are not responsible for the statements made by or attributed to others in this report.
Disclosure
Funds managed by Sandon Capital own securities in BlueScope Steel Ltd.
2015 Sandon Capital Pty Ltd ABN 98 130 853 691, AFSL 331 663.
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Company Description
Investment Thesis Cheapest Steel Company in the World
Australian Steel Products Mothball Steelmaking Facilities?
Global Building Solutions Does it Belong in the Portfolio?
Capital Management Address Interest Costs & Consider Buyback
Western Port Does the Land have a Higher Value Use?
North Star JV Worth More to Another Owner?
Financials
Valuation
Key Business Risks
Sandon Capital Pty Ltd
Contents
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Company Description
BlueScope Steel (BSL) is a steel manufacturing and distribution company with assets in Australia, New Zealand, Asia and North America. The company has five operating segments: Australian Steel Products 34% FY14 EBITDA NZ & Pacific Steel Products 19% FY14 EBITDA Building Products ASEAN, North America & India 21% FY14 EBITDA Global Building Solutions 9% FY14 EBITDA Hot Rolled Products North America 16% FY14 EBITDA
The company has a market capitalisation of ~A$1.8bn
The Balance Sheet is in good shape with net debt of ~A$300m1
1. BSL fully consolidate the $222m of debt that is carried in the Nippon Steel JV. Sandon only includes BSLs 50% share when calculating net debt
Sandon Capital Pty Ltd
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Company Description Global Manufacturing Footprint
Sandon Capital Pty Ltd
Source: BlueScope Steel
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Investment Thesis Cheapest Steel Company in the World BSL sum-of-the-parts is worth significantly more than its current market value
US listed steel companies trade on 9-12x EBIT. Applying these multiples to BSLs 50% share in the North Star JV implies a value of A$1.1-1.4bn
The Building Products JV with Nippon Steel (Nippon JV) in 2012 was done at an agreed EV of US$1.36bn. At current exchange rates, this values BSLs share of the JV at A$870m Earnings in the JV today are 30% higher than when the deal was consummated
The implied value of the remaining assets within BlueScope is $400m in FY14 and we expect similar earnings in FY15
Further potential latent value lies in restructuring the Australian steelmaking business, unutilised land at Western Port and the A$2.8bn of carried forward tax losses in the Australian tax consolidated group
Sandon Capital Pty Ltd
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Investment Thesis Sum-of-the-Parts
BSL sum-of-the-parts is worth significantly more than the current market value
The table below does not ascribe any value for: 1. Potential EBITDA improvement from the rationalisation of Australian Steel Products 2. Potential value of surplus land at Western Port 3. The estimated A$2.8bn of carried forward tax losses in the BSL Australian tax
consolidated group1
Sandon Capital Pty Ltd
Basis Range Value Building Products ASEAN, Nth Am & India Transaction price 871.8 871.8 Hot Rolled Products North America FY16 EBIT multiple 9 12 1,041.7 1,388.9 Enterprise Value 1,913.5 2,260.7 Implied Value of stub 161.7 -185.6
FY15 'stub' EBITDA (pre-corporate) 411.1 411.1 Implied EV / EBITDA multiple 0.4x -0.5x FY15 'stub' EBITDA (post-corporate) 344.4 344.4 Implied EV / EBITDA multiple 0.5x -0.5x
1. There will be no Australian income tax payments until losses in Australia are recouped
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Investment Thesis Cheapest Steel Company in the World
Source: Company reports, Sandon Capital analysis
BSL is significantly cheaper than all other major global steel producers on a tangible asset basis and an earnings basis
Given BSLs high quality asset base, Sandon believes that the company should trade at a premium to many global peers
0.00.5
1.0
1.5
2.0
2.5
3.0
3.5Global Steel Producers Price / NTA
0
2
4
6
8
10
12Global Steel Producers CY15 EV / EBITDA
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Investment Thesis Closing the Gap between Price & Value To close the gap between price and value, we believe there are several
opportunities that management should consider and address:
1) Is further rationalisation required in the companys Australian steel manufacturing business?
Sandon believes Australian Steel Products earnings and cash flow can be materially improved by mothballing the Port Kembla furnace, importing substrate requirements and removing the need to export commodity products at a significant loss
2) Does the Global Building Solutions business fit in the portfolio?
3) Undertaking capital management initiatives Address high interest burden and consider share buyback
4) Is there a higher value use for the surplus land at Western Port?
5) Is the North Star JV worth more in the hands of another owner given premium valuations of North American steel stocks?
Sandon Capital Pty Ltd
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Australian Steel Products Description
Australian Steel Products is a leading supplier of flat steel products in Australia with 70-75% market share
Port Kembla Steel Works is the key manufacturing facility 2.5Mtpa mix adjusted steelmaking capacity Long term supply contracts with BHP Billiton for iron ore and South32 for coking coal Direct access to deep-water port
Products include slab, plate, hot rolled coil, cold rolled coil, zinc / aluminium alloy-coated ZINCALUME steel and galvanized and pre-painted COLORBOND steel
The business has 125 downstream distribution points to provide a route to market
Sandon Capital Pty Ltd
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Australian Steel Products Key Earnings Drivers
Selling prices
Material costs iron ore, coal, fluxes, alloys, coating materials
Conversion costs
Foreign exchange (A$/US$)
Despatch volumes
Split of domestic & export sales
Product mix
Sandon Capital Pty Ltd
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Australian Steel Products Flow Chart & Capacities
Sandon Capital Pty Ltd
Source: BlueScope
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Australian Steel Products Exports are Loss Making
BlueScope made the difficult decision to shut the No. 6 blast furnace at Port Kembla in 2011. This decision has been justified by the subsequent increase in oversupply in the global steel industry
Today, the No. 5 blast furnace is the workhorse of the companys basic steel making operations
Despite the closure of the No. 6 furnace, BSL is still exporting >500kt of commodity products annually at a significant loss
Sandon estimates this loss to be in excess of A$200/t, implying a negative annual EBITDA impact greater than A$100m from exporting commodity steel products
Sandon Capital Pty Ltd
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Australian Steel Products Exports are Loss Making
Despite the closure of furnace No. 6, Australian Steel Products still exports a significant amount of loss-making commoditised steel
Sandon Capital Pty Ltd
Source: BlueScope, Sandon Capital analysis
0
1,000
2,000
3,000
4,000
5,000
6,000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Australian Steel Products Despatches (Kt)
Domestic Export
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Australian Steel Products Auto shuts down in 2017
With Australian automotive manufacturing set to cease in 2017, BSL will likely have to export a further ~80kt of product that is currently sold to domestic auto manufacturers
Sandon Capital Pty Ltd
Non-dwelling construction, 31%
Dwelling construction, 31%
Engineering construction, 7%
Manufacturing, 11%
Agriculture & mining, 13%
Auto & transport, 7%
Source: BlueScope, Sandon Capital analysis
Australian Steel Products Domestic Despatches by Industry
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Australian Steel Products Mothball Furnace No. 5?
Given loss making exports are a significant drag on profitability, Sandon believes that BlueScope should examine whether it makes sense to mothball furnace No.5 and import substrates to manufacture the companys high margin branded metal coated and painted products
Sandon Capital Pty Ltd
Aust. Steel Products Domestic Despatch Mix
HRC Plate CRC Metal Coated Painted Other
Source: BlueScope, Sandon Capital analysis
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Australian Steel Products Mothball Furnace No. 5?
The chart below details the production costs for Australian Steel Products
Conversion and overhead is a significant component of the cost of production. This is predominantly made up by labour and utility costs, an area that Australia is significantly disadvantaged relative to most other steel making countries
Sandon Capital Pty Ltd
Source: BlueScope, Sandon Capital analysis
Steel Production Costs
Conversion & overhead Depreciation Freight Raw materials
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Australian Steel Products Mothball Furnace No. 5?
Sandon believes that unless the A$/US$ exchange rate remains consistently below 0.65, BlueScope steel production costs will remain at the high end of the global steel cost curve and profitability will be sub-optimal
Therefore, we believe the company should closely examine the long term sustainability of the remaining operating blast furnace at Port Kembla
Any shutdown will have a significant cost, however this would be more than offset by the improved profitability from not having to sell commodity steel into the export market at a significant loss
Shutting down the blast furnace would also re-position the company as a downstream producer of high quality branded steel products that is shielded from the vagaries of commodity price cycles
We would expect a company with these attributes to command a materially higher valuation in the Australian equity market
Sandon Capital Pty Ltd
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Global Building Solutions Description
The Global Building Solutions business is a designer and manufacturer of engineered building systems (EBS)
The segment services the low rise, non-residential construction needs of its global customers
Engineering and manufacturing bases are located in Asia and North America
The segment also includes BSLs metal coating, painting and Lysaght operations in China
Sandon Capital Pty Ltd
Source: BSL Global Building Solutions
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Global Building Solutions Footprint
Sandon Capital Pty Ltd
Source: BSL Global Building Solutions
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Global Building Solutions Key Earnings Drivers
Sales Volumes largely influenced by non-residential construction in China and the US as well as construction activity in global accounts
Margins influenced by pricing of contracts, input costs and volumes
Currency The segments trade is largely denominated in US$ and CNY, hence exchange rate fluctuations will impact when offshore earnings are translated into BSLs A$ reporting currency
General cost inflation
Sandon Capital Pty Ltd
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Global Building Solutions Cyclical & Volatile
The earnings and return profile of the Global Building Solutions business has been cyclical and volatile
Only once in twelve years of ownership has the segment delivered an acceptable return on equity
Furthermore, the anaemic returns have been boosted by the >A$150m in write-downs that have occurred since FY09
Sandon Capital Pty Ltd
-15
0
15
30
45
60
75
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
EBIT
(A$m
)
Source: BlueScope, Sandon Capital analysis
0.0%
2.5%
5.0%
7.5%
10.0%
12.5%
0
150
300
450
600
750
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Retu
rn o
n N
et O
pera
ting
Asse
ts
Net
Ope
ratin
g As
sets
(A$m
)
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Global Building Solutions Divestment Candidate
In an update on the division given in November 2012, management was targeting FY15 sales of A$3bn, double the sales achieved in FY12
Adjusting for the removal of the Australian Building Solutions business (moved to the Australian Steel Products segment) revenue growth between FY12 and FY15 will be 15-20%, well below managements target of 100% growth
Given the continued revenue growth and margin disappointments, in addition to the cyclical and volatile earnings trajectory, we believe BSL management should examine divestment of the Global Building Solutions business
Assuming a conservative 6x EBITDA multiple, we think the business could be sold for A$350-400m. The business would command a higher value if sold for asset backing Sandon estimates that net tangible asset backing within the segment is ~A$450m
Any sale proceeds should be used for capital management purposes
Sandon Capital Pty Ltd
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Capital Management Interest Burden too High
BSLs Balance Sheet is in better shape than it has been in for many years
At last balance date, the company had gross debt of A$798.4m and cash of A$390.3m resulting in net debt of A$408.1m (debt in Nippon JV is fully consolidated)
Despite the significant improvement in the Balance Sheet and continued reduction in global interest rates in the past 4+ years, BSL is still paying too much in interest expense
Net interest in FY14 was A$64.5m and the half year ended December 31 was A$32.7m. This is an effective interest rate of 16% on net debt and >8% on gross debt, exceptionally high for debt that is partly secured against equipment and working capital
Net interest includes ~A$8m for amortisation of facility establishment fees and the discount cost of long-term provisions. Excluding this, the interest burden is still too high
Sandon Capital Pty Ltd
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Capital Management Interest Burden too High
The company has A$500m of syndicated bank facilities in Australia that were undrawn as at 31 December 2014, for which it is paying a commitment fee of 0.8%. We believe these facilities should be significantly reduced or even eliminated
We would also expect better terms on the following instruments as they come due: US$100m within the Nippon JV expired in March 2015 US$200m within the Nippon JV expiring in March July 2016 US$300m unsecured notes expiring in May 2018 (interest rate of 7.125%)
Sandon Capital Pty Ltd
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Capital Management Dividends a Start, but More Required
The company re-commenced paying dividends in March 2015 (3c/share)
Given the limited amount of franking credits (13c/share), significant proportion of offshore earnings and large amount of Australian tax losses there is little scope for meaningful, fully franked dividends in the future
Sandon believes that at current share prices, a share buyback is a more appropriate mechanism to return cash to shareholders and increase the companys per share tangible value
Sandon Capital Pty Ltd
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Capital Management Capex should be kept to a Minimum
The company disclosed on its 1HFY15 result call that maintenance capex is in the order of A$230-250m
This is significantly below current levels of depreciation and amortisation of ~A$330m
Once the capital spending on the billet caster at NZ Steel and painting and coating capacity in Asia is complete, we would expect capex to return to close to maintenance levels
Under this scenario, we believe the company can generate A$150-200m in free cash flow at current depressed steel margins (~8-10% FCF yield)
This free cash flow could be directed towards further share repurchases in the future
Sandon Capital Pty Ltd
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Western Port Description
BlueScope owns 800 hectares of land at Hastings, 75km south east of Melbourne.
The current location and land size was based on an abandoned plan to backward integrate into a blast furnace with coke ovens in order to produce steel for a now near extinct auto industry. Located on the site today are an idled hot strip mill, a pickle line, cold mill, metal coating lines and paint lines
Product manufactured on site is sold into the building & construction, automotive and manufacturing industries directly and also via service centres
Sandon Capital Pty Ltd Source: BlueScope 2. idling of metal coating line 5 has reduced available capacity by ~230kt
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Western Port Significant Excess Land
Sandon Capital Pty Ltd
Source: BlueScope, Google Maps
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Western Port Excess Land & Underutilised Plant
According to the companys Australian and NZ Investor Briefing in May 2013, metal coating line 5 has been mothballed and the cold roll mill, metal coating line 6 and the paint line are all operating on a reduced shift basis
This suggests there is significant latent capacity at the Western Port operations as well as an excess of land that could potentially be rezoned as rural, semi-rural or industrial
Similar land in the area is selling for A$300K/hectare (rural & semi-rural) to A$1m/hectare (industrial) This is before considering any environmental remediation and/or development spend
that may be required to prepare the site for sale
With Victorias second port now unlikely to be built at Hastings, we believe it is time for BlueScope to consider whether the land at Western Port has a higher value use
Sandon Capital Pty Ltd
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Western Port Excess Land & Underutilised Plant
We believe there are two options the company should consider:
1. Maintain operations at Western Port, however sell off parcels of land that are not required for operations or as a buffer zone. We believe the company requires no more than 200 hectares of land to maintain operations, making 600 hectares redundant and potentially available for sale
2. Relocate the site operations. This would incur a capital cost, however would also likely result in reduced operating costs as all hot rolled coil currently used as a feedstock at the Western Port site is railed from the Port Kembla operations. It would also free up the entire 800 hectares of land to be remediated and developed / sold
Sandon Capital Pty Ltd
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North Star JV Description
North Star is a 50-50 JV between Cargill and BlueScope established in 1995
The JV owns a single site electric arc furnace in Ohio producing hot rolled coil
Current production capacity is 2.2M tons (initial capacity was 1.6M tons)
Original construction capital cost was US$500m (100%). ~US$200m has been invested since, which includes the installation of a new bag house
North Star sells ~80% of its production in the Mid-West of the U.S. End customer mix is broadly 45% automotive, 25% construction, 10% agricultural, 20% manufacturing / industrial appliances
Volumes are sold through service centres (78%), tubers (14%) and directly to OEMs (8%)
North Star ranks fifth by volume of hot rolled coil production in North America, and is consistently voted the number one flat rolled steel supplier in the annual Jacobson Survey of steel customer satisfaction
Sandon Capital Pty Ltd
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North Star JV Key Earnings Drivers
Steel spread the difference between the US Midwest HRC price and the cost of scrap / pig iron
Cost of other inputs such as fluxes and alloys
Energy costs predominantly electricity
Conversion costs
Despatch volumes
Foreign exchange (A$/US$) translation impact
Sandon Capital Pty Ltd
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North Star JV Strategically Located
The mill is located at Delta, Ohio
Directly within one of the largest scrap steel surplus regions in North America
The Ohio Turnpike is one mile to the north and the mill is connected to Norfolk Southern rail
90% of customers are within a 250 mile radius
Sandon Capital Pty Ltd
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North Star JV Industry Leading Operating Performance
The strategic location of the mill and the renaissance of US manufacturing has resulted in operating rates far superior to the rest of the industry
Sandon Capital Pty Ltd
Sources: North Star JV, AISI, Steel Research Associates
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North Star JV Industry Leading Margins
Higher operating rates and lower transportation costs translate to operating margins superior to the recognised gold standard (Nucor)
Sandon Capital Pty Ltd
Source: North Star JV, Nucor, Sandon Capital analysis
-200
-150
-100
-50
0
50
100
150
200
EBIT
per
ton
North Star JV vs Nucor Operating Margins
Nucor North Star JV
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North Star JV Significant Contributor to Profitability
Since listing in July 2003, the NSJV has contributed over A$1.1bn in EBIT to BSL
As most of the earnings from the JV are paid out as dividends, the carrying value of North Star on BSLs Balance Sheet is only ~A$100m
Sandon Capital Pty Ltd
-100
-75
-50
-25
0
25
50
75
100
125
1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
EBIT
(A$m
)
Source: BSL, Sandon Capital analysis
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North Star JV Worth More in the Hands of Another Owner?
The closest listed comparables to North Star in the United States are Nucor (NUE) and Steel Dynamics (STLD)
Both own mini-mills, however unlike BSL, NUE and STLD produce long steel products in addition to flat steel products
These companies trade on FY16 EV / EBIT multiples of 9-12x
If North Star was to achieve a valuation similar to US listed steel companies, it would imply a valuation of A$1.1-1.4bn for BSLs 50% share
Sandon Capital Pty Ltd
Currency Mkt Cap EV Price / NTA EV / EBITDA EV / EBIT P/E US$m US$m CY14 CY15 CY16 CY14 CY15 CY16 CY14 CY15 CY16 Nucor USD 15,883 19,315 3.2 9.3 10.6 7.6 14.2 17.4 11.3 22.4 27.8 15.6 Steel Dynamics USD 5,437 7,912 3.2 13.6 9.0 6.8 24.7 13.8 9.8 33.6 18.5 11.6 US Steel USD 3,735 5,971 1.1 5.7 9.4 5.6 14.5 -41.8 15.0 37.2 -54.2 24.5
Source: Company Reports, Bloomberg, Sandon Capital analysis
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North Star JV Worth More in the Hands of Another Owner?
The >A$1bn valuation is supported by replacement cost analysis
Big River Steel are currently building a 1.6Mt (short ton) mini-mill in Osceola, Arkansas for US$1.3bn. End products will be similar to that produced at North Star
The capital cost equates to US$812 per ton of capacity or A$1,040 per ton of capacity at a A$/US$ exchange rate of 0.78
This implies a replacement cost for BSLs 50% share of North Star of at least A$1.1bn
This is materially above the value implied in BSLs current share price
Whilst the North Star JV holding is a good generator of cash, we believe BSL Board and Management should examine whether North Star is worth more in the hands of another owner, given the premium valuations afforded to listed US steel companies
Sandon Capital Pty Ltd
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Financials Historical
Source: Company reports, Sandon Capital analysis
Year ended June 30 (A$m) FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 Profit & Loss Revenue A$m 5,302.0 6,250.1 8,727.7 8,742.5 9,635.1 11,216.2 10,998.2 9,250.1 9,831.4 9,304.7 7,910.9 8,750.5 EBITDA A$m 881.2 1,104.5 1,855.9 1,126.8 1,373.6 1,617.8 505.6 594.1 240.2 98.9 389.8 577.3 D&A A$m 270.1 286.7 297.3 287.0 317.0 350.8 353.8 340.8 347.7 323.3 315.6 327.6 EBIT A$m 611.1 817.8 1,558.6 839.8 1,056.6 1,267.0 151.8 253.3 -107.5 -224.4 74.2 249.7 EBIT margin % 11.5% 13.1% 17.9% 9.6% 11.0% 11.3% 1.4% 2.7% -1.1% -2.4% 0.9% 2.9% Effective tax rate % 0.0% 0.0% 22.0% 24.7% 25.0% 28.7% -277.0% 16.7% 46.5% 33.4% -253.8% 16.0% NOPAT A$m 611.1 817.8 1,215.2 632.5 792.4 902.8 572.3 210.9 -57.5 -149.4 262.5 209.8 NPAT A$m 611.1 817.8 1,183.0 566.8 669.5 793.2 66.0 111.3 -124.5 -237.6 6.8 111.0 E.P.S. $/share 8.14 4.82 4.77 5.59 4.70 6.38 1.46 0.37 -0.41 -0.60 0.01 0.20
Cash Flow Operating Cash Flow A$m 711.4 760.1 889.0 231.7 964.4 1,303.6 424.5 376.9 28.3 267.4 161.0 407.1 Cash Realisation Ratio % 80.7% 68.8% 60.1% 27.1% 97.8% 114.0% 101.1% 83.4% 12.7% 312.0% 49.9% 92.8% Capex A$m 183.3 289.1 578.8 764.5 399.6 393.6 733.0 365.3 387.2 215.5 293.2 297.8 Capex as a % of depreciation A$m 67.9% 100.8% 194.7% 266.4% 126.1% 112.2% 207.2% 107.2% 111.4% 66.7% 92.9% 90.9% Free Cash Flow A$m 528.1 471 310.2 -532.8 564.8 910 -308.5 11.6 -358.9 51.9 -132.2 109.3 Acquisitions A$m 716.1 290.0 17.8 2.2 8.5 1,549.8 2.7 0.0 0.0 0.0 0.0 153.6 Dividend A$m 76.6 244.6 348.2 455.7 224.4 251.9 183.7 3.7 92.7 5.0 3.4 42.9
Balance Sheet Cash A$m 91.0 119.4 84.6 61.9 36.4 44.1 369.2 251.4 172.2 214.5 513.7 466.6 Total Assets A$m 4,753.1 5,774.7 6,385.7 7,260.6 7,506.2 8,466.2 8,864.6 8,997.6 7,793.0 6,733.5 7,330.8 7,518.9 Total Debt A$m 167.9 592.7 875.9 1,952.0 1,538.1 1,765.8 1,124.9 993.9 1,239.9 598.4 662.1 728.2 Total Liabilities A$m 1,662.0 2,701.9 3,125.3 4,175.7 3,641.2 4,524.4 3,201.3 3,241.9 3,396.9 2,954.7 2,870.5 3,062.2 Shareholders Funds A$m 3,091.1 3,072.8 3,260.4 3,084.9 3,865.0 3,941.8 5,663.3 5,755.7 4,396.1 3,778.8 4,460.3 4,456.7 Minority Interest A$m 38.8 53.3 43.2 50.9 67.3 74.7 83.8 94.4 87.3 99.5 407.4 395.2 Invested Capital A$m 3,297.8 3,718.8 4,179.5 5,087.8 5,470.4 5,782.3 6,872.0 6,844.0 5,723.3 4,476.7 5,529.8 5,580.1 Gearing (Net Debt / EBITDA) % 0.1x 0.4x 0.4x 1.7x 1.1x 1.1x 1.5x 1.2x 4.4x 3.9x 0.4x 0.5x Return on Assets % 12.9% 15.5% 25.6% 12.3% 14.3% 15.9% 1.8% 2.8% -1.3% -3.1% 1.1% 3.4% Return on Equity % 19.8% 26.5% 37.4% 17.9% 19.3% 20.3% 1.4% 1.9% -2.5% -5.8% 0.2% 2.5% ROIC % 18.5% 22.0% 29.1% 12.4% 14.5% 15.6% 8.3% 3.1% -1.0% -3.3% 4.7% 3.8%
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Financials Balance Sheet
Source: Company reports, Sandon Capital analysis
ASSETS Current assets Cash 390.3 Receivables 1,066.2 Inventories 1,620.4 Other current assets 76.6 Total current assets 3,153.5 Non-current assets PP&E 3,652.8 Intangibles 492.1 Investments 162.0 Deferred tax 171.1 Other non-current assets 99.7 Total non-current assets 4,577.7 Total assets 7,731.2 LIABILITIES Current liabilities Payables 1,194.7 Short-term debt 73.7 Provisions 460.7 Other current liabilities 172.5 Total current liabilities 1,901.6 Non-current liabilities Long-term debt 724.7 Provisions 199.4 Retirement benefit obligations 193.6 Other non-current liabilities 29.6 Total non-current liabilities 1,147.3 Total liabilities 3,048.9
EQUITY 4,682.3
Balance Sheet notes: The North Star JV is only carried
at ~$100m in BSL accounts
The Building Products JV with Nippon is fully consolidated in BSL accounts
As at 30 June 2014, BSL had A$2.3bn of unused tax losses for which no deferred tax asset had been recognised. This number was not updated in the accounts for 31 December 2014
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Valuation
Share price 3.09 Shares on issue 573.6 Market Capitalisation 1,772.3 Net Debt1 297.1 EV 2,069.4 NTA 6.17
Multiples FY12 FY13 FY14 FY15E FY16E EV / Revenue 0.2x 0.3x 0.2x 0.2x 0.2x EV / EBITDA 20.9x 6.3x 4.1x 3.9x 4.0x EV / EBIT -9.2x 60.2x 10.1x 8.5x 9.3x P / E -5.1x 253.7x 15.6x 13.9x 14.7x FCF Yield 3.8% -7.7% 6.3% -0.3% 9.0% Dividend Yield 1.9%
Source: Company reports, Sandon Capital analysis 1. BSL fully consolidate the $222m of debt that is carried in the Nippon Steel JV. Sandon only includes BSLs 50% share when calculating net debt
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Valuation Extremely Cheap in a Global Context
Source: Bloomberg, Company reports, Sandon Capital analysis
Currency Mkt Cap EV Price / NTA EV / EBITDA EV / EBIT P/E US$m US$m CY14 CY15E CY16E CY14 CY15E CY16E CY14 CY15E CY16E Asia NSSMC (Nippon) JPY 26,640 46,174 1.0 8.6 7.9 7.4 17.0 15.3 13.2 14.4 11.7 10.1 JFE Holdings JPY 15,054 26,857 1.0 8.7 7.6 6.9 16.3 13.3 11.4 13.5 10.8 9.5 POSCO KRW 18,364 40,682 0.5 7.0 6.9 6.5 14.1 14.0 12.6 31.6 11.3 9.7 Hyundai Steel KRW 7,338 17,879 0.6 7.4 6.9 6.6 13.3 12.1 11.3 10.6 8.3 7.9 Baosteel CNY 23,818 33,178 1.3 11.0 9.5 8.3 25.1 18.8 16.2 25.6 21.2 18.1 Angang CNY 8,611 11,846 1.3 12.0 10.1 8.9 34.0 27.3 21.3 60.9 51.3 34.1 China Steel TWD 12,666 21,604 1.2 10.2 11.0 10.2 22.4 25.7 23.0 17.4 19.4 17.8 Europe Thyssen Krupp EUR 15,625 21,007 -3.6 7.8 6.5 5.9 15.1 11.0 9.3 90.1 22.0 15.0 Voestalpine EUR 8,159 11,684 2.2 7.3 6.9 6.4 12.4 11.6 10.6 13.9 12.9 11.5 SSAB EUR 3,113 6,416 2.2 15.7 9.3 8.1 nmf 26.3 18.3 -15.1 23.7 15.1 Arcelor Mittal USD 18,985 38,480 0.8 4.8 6.4 5.4 9.6 16.0 11.3 13.4 -52.1 18.4 North America Nucor USD 15,883 19,315 3.2 9.3 10.6 7.6 14.2 17.4 11.3 22.4 27.8 15.6 Steel Dynamics USD 5,437 7,912 3.2 13.6 9.0 6.8 24.7 13.8 9.8 33.6 18.5 11.6 US Steel USD 3,735 5,971 1.1 5.7 9.4 5.6 14.5 -41.8 15.0 37.2 -54.2 24.5 BlueScope Steel AUD 1,347 1,577 0.4 4.7 3.8 4.1 14.9 8.5 9.7 30.0 12.2 16.2
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Indicative Annual EBIT Sensitivities
Source: BlueScope, Sandon Capital analysis 1. Based on an A$/US$ rate of 0.80 2. Only includes impact on US$ denominated export prices & costs and impact of translating offshore earnings to A$. Does not reflect impact
on Australian domestic pricing
Sensitivity Impact1 (A$m)
+/- US$10 / tonne movement in average realised export HRC price +/- 28
+/- US$10 / tonne movement in coking coal costs +/- 22
+/- US$10 / tonne movement in iron ore costs at Aust. Steel Products +/- 50
+/- US$10 / tonne movement in 62% Fe Index price on NZ iron sands +/- 14
+/- 1c movement in A$ / US$ exchange rate2 +/- 6
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Key Business Risks Global economic activity Global steel demand and global production capacity
Steel price fluctuations
Raw material price fluctuations
Competition from substitutes
Exchange rate fluctuations translation & operational
Environmental laws and regulations, including potential and existing emissions trading schemes and carbon pricing mechanisms
Industrial relations
Pension plan liabilities
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Gabriel Radzyminski Portfolio Manager & Analyst Gabriel established Sandon Capital in 2008 after having devised and managed a number of successful investment funds for a leading high net worth wealth management firm. Sandon Capital has successfully invested its funds on behalf of wholesale clients, and advised shareholders, in a variety of listed companies, funds and trusts that have benefit from its activist investment strategy. Gabriel is currently Chairman of Sandon Capital Investments Limited, and is a non executive director of Mercantile Investment Company Ltd, Chesser Resources Ltd and Future Generation Investment Company Ltd.
Campbell Morgan Analyst Campbell joined Sandon in 2014 and has 13 years of experience in both Australian and International financial markets. Prior to joining Sandon, Campbell managed a Global Materials portfolio for Millennium, a New York based hedge fund with US$25bn under management. Preceding this he was a Senior Analyst for a Global Industrials portfolio at Citadel Investment Group, a US$25bn Chicago based hedge fund. Campbell started his career in Australia, working in the Investment Bank at ANZ and after that as an Equity Research Analyst for Merrill Lynch before moving overseas in 2007 to work in Funds Management.
Contact Office Phone +612 8014 1188 Email [email protected] Gabriel Mobile +61 408 936 357 Email [email protected] Campbell Mobile +61 487 429 105 Email [email protected]
Sandon Capital Team
Sandon Capital Pty Ltd
Slide Number 1Important informationContentsCompany DescriptionCompany Description Global Manufacturing FootprintInvestment Thesis Cheapest Steel Company in the WorldInvestment Thesis Sum-of-the-PartsInvestment Thesis Cheapest Steel Company in the WorldInvestment Thesis Closing the Gap between Price & ValueAustralian Steel Products DescriptionAustralian Steel Products Key Earnings DriversAustralian Steel Products Flow Chart & Capacities Australian Steel Products Exports are Loss Making Australian Steel Products Exports are Loss MakingAustralian Steel Products Auto shuts down in 2017 Australian Steel Products Mothball Furnace No. 5?Australian Steel Products Mothball Furnace No. 5?Australian Steel Products Mothball Furnace No. 5?Global Building Solutions DescriptionGlobal Building Solutions FootprintGlobal Building Solutions Key Earnings DriversGlobal Building Solutions Cyclical & VolatileGlobal Building Solutions Divestment CandidateCapital Management Interest Burden too High Capital Management Interest Burden too High Capital Management Dividends a Start, but More RequiredCapital Management Capex should be kept to a MinimumWestern Port DescriptionWestern Port Significant Excess LandWestern Port Excess Land & Underutilised PlantWestern Port Excess Land & Underutilised PlantNorth Star JV DescriptionNorth Star JV Key Earnings DriversNorth Star JV Strategically LocatedNorth Star JV Industry Leading Operating PerformanceNorth Star JV Industry Leading Margins North Star JV Significant Contributor to ProfitabilityNorth Star JV Worth More in the Hands of Another Owner?North Star JV Worth More in the Hands of Another Owner?Financials HistoricalFinancials Balance SheetValuationValuation Extremely Cheap in a Global ContextIndicative Annual EBIT SensitivitiesKey Business RisksSandon Capital Team