BlueScope Steel chief executive Paul O'Malley says the strength in the residential construction sector on the eastern seaboard of Australia still has a "few years to run" and the difficult Western Australian residential building market has now bottomed out.
The twin engines of a rapidly improving Australian business and booming operations in the United States have the company strongly positioned to take advantage of improving steel prices and reap the benefits of heavy cost-cutting.
Shares in BlueScope climbed 4 per cent on Monday to close at $12.68, marking the highest stock price in almost seven years for a company that has undergone heavy restructuring after some difficult times at its Port Kembla steel operations in NSW, which only 18 months ago were under threat of potential closure. The stock was sitting at $5.25 this time last year.
There is also upside from small but fast-growing businesses such as those in India, where the company has a joint venture with Tata. "We're on a winner in India," Mr O'Malley said on Monday.
BlueScope has upgraded profits five times in the past 18 months to become a new sharemarket darling and Mr O'Malley said this is before any real impact from the pro-growth policies on the US domestic economy by new President Donald Trump. BlueScope's strong first-half profits delivered on Monday were "effectively pre-Trump", he said.
The only real negative is rapidly escalating electricity costs, which Mr O'Malley warned was a big impost for industry across Australia because it made the country far less competitive than the US, where power costs were from five to 10 times lower.
Robust sales growth
Mr O'Malley has stripped out more than $300 million in annualised costs from the Australian operations, which make coated and painted steel products for the building sector including Colorbond steel roofing products, with the NSW and Victorian markets producing robust sales growth for the company.
A combination of robust population growth in Sydney and Melbourne, strong house price growth and record low interest rates is helping to underpin demand, which he expects to remain strong in those centres. Western Australia, which has been hit hard by the mining downturn, appears to have already been through rock bottom, with some early signs of marginal improvement.
The Australian steel products business, which has two main manufacturing facilities at Port Kembla, south of Wollongong in NSW, and at Western Port in Victoria, generated a 40 per cent rise in underlying earnings before interest and tax to $242.5 million for the first half of 2016-17. BlueScope's overall net profit was up 79 per cent to $359.1 million and the company also announced a share buyback of $150 million. Shareholders will be paid an interim fully-franked dividend of 4¢ per share on March 30, up from 3¢ a year earlier.
Mr O'Malley's main worry is soaring electricity costs in Australia, which he said were set to climb even higher because of poor policy-making over the past decade. "The hip pocket cost to industry, large and small, and to consumers is going to be substantial," he said.
The improving performance of the Australian unit was overshadowed by the stellar jump in profits at the booming North Star operations based in Ohio in the United States. BlueScope cleverly moved to full ownership at the end of October, 2015 by exercising its right to acquire the remaining 50 per cent it didn't already own, just as strict anti-dumping measures and improvements in the US steel market kicked in.
The North Star BlueScope Steel division lifted underlying earnings more than fourfold to $242.5 million in the first half of 2016-17, up from $42.4 million in the same half a year earlier. BlueScope had the advantage of a full contribution from its 100 per cent share this time around.
