Bisalloy Steel Ltd (BIS) – Analysis 10 September 2023
What does it do?
BISALLOY is an Australian company – and the only company in Australia which produces a range of quenched and tempered (Q&T) high tensile & abrasion resistant steel plates across three main product areas:
· High wear to steel parts in engineering, mining, earthmoving & agriculture
· Structural speciality steels and
· Armour grade speciality steels for defence related contracts worldwide via strategic partnerships
Their catchcry is simply this: innovative steel solutions for extreme environments.
The company’s plant at Unanderra (near Wollongong & Bluescope Steel which supplies the greenfeed) is highly automated, efficient, and capable of turning out relatively low-cost, high-grade product.
The company has significant distribution channels in Indonesia and Thailand together with a significant Chinese joint venture in Shandong province.
The FY23 Result
Not as strong as the outstanding FY22 year as gross margins reverted to normalised levels following huge price rises & strong volume growth in that year. Also, one-off savings in overheads in FY22 were not repeatable and then FY23 was beset with higher greenfeed, energy and freight costs.
That said BIS, which reports market share gains in FY23, has attained a level of maturity and strength way beyond its earlier years, and this appears to be the future trajectory forged on the back of stronger systems, contacts and a larger world focus when tendering for lucrative defence contracts in concert with its partner, the large South Korean manufacturer Hanwha. For example, BIS is set to supply the Q&T plating on the large Egyptian defence contract.
Whilst NPAT decreased 12.2% on FY22 to $13.5m (eps of 28.2c) it should be acknowledged that the average 5-year CAGR is just shy of 30%.
The company maintained the fully franked dividend at 13.5c, which is an outstanding grossed up return of 9.2%, based upon current share price of $2.10. With some $11.2m in franking credits after allowing for the FY23 final dividend, the company has approximately two years of FC’s up its sleeve. This may prompt a special dividend once debt is extinguished and working capital requirements reduced. They increased by approximately $10m in FY23.
More importantly, 52% of the FY23 earnings were used to reinvest and pay down debt; not a bad option when the company is generating ROCE of around 24%.
What interested me in buying these shares?
· Almost monopolistic status in the specialized and in demand quench and thirst steel market
· Low levels of debt and reducing year on year
· Significant fully franked dividend distributor whilst distributing less than half of eps
· Stability and growth over the past two years
· Solid ROCE of 24% in FY23
· At a SP of $2.10 it represents good buying on a forward PE of 8.13 and an EV/FY24 EBIT of 5.8x
· Exposure to the growing worldwide defence industry
· Solid management with a revitalized sales plan
· Exposure to the minerals and agricultural sectors
Where do I think this company will be at the end of the current financial year – FY24?
Without committing to hard numbers, the company simply states that it ‘’remains optimistic to deliver another strong year’’ whilst cautioning that downside risks are building with a global slowdown a possibility driven by lagging Chinese demand which may affect both prices and volume.
Rising electricity and gas prices will affect not only BIS, but its primary customers as well in the mining & agricultural sectors. And it will impact upon its freightage costs to the large WA mining industry.
Balancing this are the imminent release of a number of new products and the growing defence industry requirements caused by a less stable world. For example, the Bushmasters which have been supplied to Ukraine by the Australian Government use the BIS Q&T armour plating.
My estimates are as follows:
Revenue $160m
NPAT $12.4m
FY24 EPS 25c (adjusted down for conservatism)
Dividends 13.5c ff
BV per share $1.62
Where do I think the company will be in 3-years’ time (FY26)?
Presuming modest growth at just 10%, FY26 should see the following:
Revenue $194m
NPAT $15m
EPS $0.31
Divs $015
BV $1.93
Conclusion on Gross Returns over the Next 3 Years
Grossed up dividends of $0.60 per share and an increase in book value of $0.42 – a straight line annual increase of 34c on the current share price of $2.10 – annual return of 16.2%
What about Balance Sheet strength?
During FY23, BIS paid down some $6.1m in debt. Net debt stands at just $2.3m whilst the company has some $27.1m in unused debt facilities.
What are the catalysts for a rerating of this company?
· Strong competitive moat – bordering on a monopoly - by virtue of sole Q&T production in Australia
· ALP policy to protect and strengthen Aussie steel and aluminium production
· Supply chains reverting to Australia in deference to China (in particular)
· A vital manufacturing capability deserving of government protection in times of defence peril
· Winning of large defence contracts in concert with Hanwha & possibly Rheinmetall. For example, the May 2023 ‘significant order’ placed by Hanwha for the Egyptian K9, K10 & K11 programs (howitzers which are hot property presently)
· Potential scaling up of the Australian Land 8118 requirements (Tanks)
· AUKUS and Snowy River 2 project wins
· Falling AUD makes BIS contracts more competitive
· Anti-dumping wins
· Cost savings from improved productivity programs
What about management’s ability to develop the potential of the company?
Management is experienced, have set clearly defined plans/strategies and have executed well, particularly over the past two years.
Specifically of note are their efforts to refresh and reenergize the sales team and also their efforts to foster important strategic alliances with large worldwide defence contractors like Hanwha, an association which will generate deep value for the years ahead. They are now embedded in the South Korea defence plans.
My only concern is the lack of ownership, particularly by their CEO.
What are the likely red flags which might trigger a sell decision?
· Likely increases in input costs for a business which is energy (electricity & gas) intensive (particularly greenfeed, power & transport) – driven by external factors and governmental policies to reduce carbon emissions
· Related to the above is a reducing gross margin should these additional costs not be capable of being passed on
· Economic and civil disruption in its Chinese joint venture (it generated NPBT of $6.5m in FY23)
· Difficult business conditions and depressed demand for Q&T in China
· Lack of any monetary investment by Rowan Melrose the MD and CEO. In contrast, Chairman David Balkin has some 7.78m ordinary shares
· Increased competition from imported product though the company continually seeks governmental assistance in anti-dumping measures
· Falling worldwide demand for steel