BlueScope has released a 1H16 trading update to the market today as well as announcing the acquisition of the remaining 50% stake in North Star BlueScope LLC. The news has been positively received by the market, with the share price up 10.6% for the day
Trading update – key highlights:
- The company has upgraded its earnings outlook and now expects approximately 40% growth in underlying EBIT in 1H16 compared to 2H15, or a $50m increase to its previous outlook. The upgrade is due to earlier than planned cost reductions in the Australian Steel Products segment, strength in domestic demand, and benefits from the weaker AUD
- The guidance is subject to spreads, foreign exchange and market conditions. The company expects margin pressure in 2H16 given spot spreads are lower than lagged spreads
- BlueScope has also announced that steel production will continue at the Port Kembla facility, subject to ratification of the new Enterprise Agreements which will help to secure $60m per annum in labour cost savings. The NSW Government has also agreed to defer $60m of payroll tax payments over the next three years, as well as reductions in other charges
- The company is confident that the cost-out commitments will deliver more than $200m in operational savings in Australia by FY17
North Star Acquisition
- Today BlueScope announced it has agreed to acquire Cargill’s 50% share of North Star BlueScope Steel LLC for USD720m to take its ownership to 100%. North Star is a producer of 2.0 million tonnes per annum (mtpa) of hot rolled coil at its mini-mill located in Delta, Ohio. The business is recognised by customers as the leading mini-mill in the US based on quality, service and reliable delivery, and it has consistently operated at full capacity
- North Star has delivered consistent financial performance and strong returns on invested capital to BlueScope. Since FY05 inclusive, its 50% ownership has returned over $1.1bn of cash dividends highlighting good free cash flow generation
- The acquisition consideration, together with net debt (assumed to be USD40m as at 30 September 2015) implies a multiple of 7.1x FY15 EBITDA. Pro-forma FY16 cashflow is improved by an estimated 26% per share
- It is anticipated that the transaction will be funded through a combination of a US bonds and longer term bank debt. A fully funded interim facility is in place to support the acquisition
- The BlueScope Board is committed to reducing debt following the acquisition, to retain financial flexibility and a robust balance sheet. They are targeting a conservative 1.0x net debt to EBITDA ratio within 12 to 18 months. This is expected to be achieved through divestments and operating cash flow
- In summary, the acquisition is credit positive given North Star’s contribution to free cash flow
The 7.125% May 2018 USD BlueScope bond is currently offering an indicative yield to maturity of 6.55%*, BlueScope offers investors high yielding exposure to a quality Australian business.
More information
Links to the ASX releases from BlueScope are below:
Trading update
North Star acquisition
*Please note rates are accurate as at 27 October 2015 and subject to change. For more information please contact your FIIG representative.