Merrill Lynch analyst Ben Chan rates Bluescope Steel a...

Merrill Lynch analyst Ben Chan rates Bluescope Steel a buy

Michael Bennet
From: The Australian
February 05, 2010 1:40PM

MERRILL Lynch has restarted coverage of the steel sector with a buy on Bluescope Steel and a price target of $3.30.

Onesteel and Sims Metal Management however didn't fare as well, with both copping a neutral recommendation from Merrill analyst Ben Chan.

Merrill has a 12-month target of $3.50 on Onesteel ($3.11 today) and $22.80 on Sims ($20.64 today).

On Onesteel, Mr Chan said iron ore driven earnings growth and Australia's gradual construction recovery is already "appropriately reflected" in its price, with risks being problems in China and carbon reduction initiatives.

Merrill tips Onesteel to post EPS growth of 119 per cent in FY11 and growth of 31 per cent in FY12.

The consensus was much the same on Sims, with Chan saying its strategy of gaining control over its cost base through consolidation, mainly in the US scrap market, being pretty much priced in.

But Chan also sees more acquisitions on the way.

"Post an equity raising in November 2009, we estimate that Sims has capacity to acquire up to an additional 10 per cent of this market. Further industry consolidation would give Sims greater control over its cost base and ultimately lead to improved returns," he said in a note to clients today.

He tips the scrap price to be flat in FY10 before a 6 per cent spike in FY11.

But Bluescope, which last traded at $2.58, is Chan's "preferred player in the sector.

He forecasts EPS growth of 42 per cent in FY10 and 184 per cent in FY11, based largely on a $1.66 billion turnaround driven by a recovered steel price and resumption of the second blast furnace at Port Kembla.

But again, the biggest risk appears to be Chinas recent moves to slowdown its overheated economy.

"Given the change in monetary policy stance in China in recent days, we see the biggest risk to Bluescope being a meaningful demand reduction in the region leading to reduced utilisation rates and falling prices."

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