ASX Midcap Stock from An Industry that Propels the Economic Engine

  • November 13, 2020 05:54 PM AEDT
  • Team Kalkine
ASX Midcap Stock from An Industry that Propels the Economic Engine

The year 2021 is on the horizon, and as the clock is ticking, post the positive news on COVID-19 vaccine development, expectations on different fronts are simmering across the globe. Recently, Pfizer announced that its COVID-19 vaccine remained 90 per cent effective against the virus in stage 3 clinical trials.

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The government authorities across the global are keeping a keen eye on economic activities and putting their best foot forward to ensure that the economic engine does not sputter. Typically, under such Marco set up the tailwinds for the backbone of every growing economy -steel industry is strong.

Steel has been among the hardest hit commodity of the year with demand and prices on the global front plunging considerably.

However, now with the revival of the steel sector witnessed even outside China, the World Steel Association (WSA) is anticipating the global demand to recover 4.4 per cent in 2021 against 2020 at 1,795.1 million tonnes.

The demand growth for the commodity is keenly tracked on account of a recovery in high-steel using sectors such as construction, which remained more resilient to the COVID-19 shock as many governments focused on implementing public projects, pushing automotive, and machinery industries.  

Likewise, the demand for steel products across Australia is also picking pace, making the commodity a hot one.

Midcap Steel Company that has caught Mr Market’s attention

One ASX listed midcap steel stock that has grabbed the investors’ attention is BlueScope Steel Limited (ASX:BSL). Over the short-term, the stock has seen a sharp recovery from $8.050 (low in March 2020) to the present 52-week high of $16.550 (intraday high on 12 November 2020), 105% return.

BSL has climbed the ASX price ladder swiftly to a new 52-week high. Despite the COVID headwinds, the stock has managed to deliver a YTD return of 8.83 per cent. The YTD total returns delivered by the stock beat the returns from many major indices, including S&P/ASX 200, S&P/ASX 200 Resources, and S&P/ASX 200 Materials.

Short-term Price Boosters

  • Higher Earnings Expectations

BSL recently notified shareholders about the 1H FY2021 earnings guidance, and the Company expects a 30 per cent growth in the underlying earnings before interest and tax (EBIT) during the 1H FY2021 against the second half of FY2020 (previous period).

BSL built the expectation on improving performance from different business segments as demand for steel products improve on the domestic as well on the global front with the U.S. North Star project continuing to despatch at full capacity.

  • A $40 Million Contribution from the Properties Group into the 1H FY2021 Earnings Expectations

Apart from the improving performance and recovering demand for steel products, the recent sale of an industrial warehouse property developed by the properties group of the Company is also expected to contribute significantly into the 1H FY2021 earnings.

The sale of the industrial warehouse property is projected to add a further $40 million into the underlying EBIT expectations for the period.

However, the same contribution is not expected thereafter in 2H FY2021.

The higher earnings expectations for the 1H FY2021 (ending 31 December 2020) has bolstered the stock on ASX over the short-term, taking the stock to a fresh 52-week high, two times in a row over the last 3 weeks.

The Trend Builder

While the stock has gained considerable momentum over the short-term, robust financials along with a resilient asset portfolio and effective business strategy, have been the trend builder for the stock. BSL has been in a continuous uptrend since 2013 with consecutive peaks in 2016,2017, 2018, and now 2020.

Over the past five years, BSL has delivered a massive total return of 334.76 per cent, outperforming all major equity indices.

Astonishing Revenue and Profitability Track Record

BSL reported revenue of $11,324.20 million in FY2020, marking a compounded annual growth rate of  6 per cent since FY2013. The higher revenue of the Company for the period further transcended into decent profitability with the Company reporting a net profit of $353.00 million, representing a CAGR of 28 per cent for the same period.

The profitability of the Company witnessed a declined in FY2020 against the previous period, primarily due to the impact COVID-19 outbreak.

However, the Company now seems to be on a path to recovery with FY2021 estimates improving over the performance of the previous financial year.

The Company now estimates a 30 per cent growth in the 2H FY2020 underlying EBIT of $262 million, leading to an estimated EBIT of $340.6 million for the first half of the financial year 2021. However, the 1H FY2021 EBIT at $340.6 million, represents ~ 63.07 per cent of the EBIT reported by the Company in FY2020, giving itself more room to surpass the FY2020 EBIT if the business conditions do not change materially.

Bottomline: With the positive news on vaccine development unfolding, the market players have shifted their focus on risk-on trade. Investors must closely track the development as the world is not yet out of the COVID-19 pandemic. Government stimulus bodes well for steel players and with the market attention shifting back on economic drivers, the focus on traditional industries is back on. However, investors should focus on risk reward before taking a call.


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