Sandon Capital recently published a 46-page presentation with their thoughts on a company called BlueScope Steel (BSL), a A$1.8bn Australian listed steel producer with global operations. BSL today is the cheapest steel company in the world and has an opportunity to reposition itself as a downstream producer of high quality steel products that is shielded from the vagaries of commodity price cycles. By following this path, we believe that significant value could be unlocked, and the large gap between the current share price and our assessment of the company’s intrinsic value would close.
Sandon would like the Board and Management of BSL to consider and publicly address the following opportunities:
- Is further rationalisation required in the company’s Australian steel manufacturing business?
- Does the Global Building Solutions business fit in the current portfolio?
- The implementation of capital management initiatives.
- Is there a higher value use for the surplus land at Western Port?
- Is the North Star JV worth more in the hands of another owner given the valuations of North American steel stocks?
Sandon Capital has written a letter to the Chairman of the company and they intend to actively discuss the opportunities outlined above with other participants in the market, including existing BlueScope shareholders, many of whom we know share similar views in respect of the mispricing of the stock relative to its underlying value.
Sandon Capital Presentation On BlueScope Steel Limited (BSL)
- 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
Investment Thesis – Cheapest Steel Company in the World
- BlueScope Steel 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 BSL’s 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 BSL’s 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 <A$200m. These assets generated EBITDA of >$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
- BlueScope Steel sum-of-the-parts is worth significantly more than the current market value
- The table below does not ascribe any value for:
- Potential EBITDA improvement from the rationalisation of Australian Steel Products
- Potential value of surplus land at Western Port
- The estimated A$2.8bn of carried forward tax losses in the BSL Australian tax consolidated group
Cheapest Steel Company in the World
- BlueScope Steel is significantly cheaper than all other major global steel producers on a tangible asset basis and an earnings basis
- Given BSL’s high quality asset base, Sandon believes that the company should trade at a premium to many global peers
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 company’s 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?
See full presentation below.