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Date : 05/07/2021

Bisalloy Steel Group

ASX :

BIS

Market Cap : $55.53 Million

Dividend Per Share : $0.05

Dividend Yield : 4.29 %

Buy

52 Week Range : $0.89 - 1.54

Share Price : $1.165

Strong financials, strong dividends, and increasing profitability as the firm operates in a booming sector. A "Buy" from us.

Company Analysis

Bisalloy Steel (ASX: BIS) has exclusivity in Australia when it comes to manufacturing and providing high-quality steel products such as high-tensile, abrasion-resistant quenched and tempered steel plates that are used for armour, structural and wear-resistant steel applications. Over forty decades in, Bisalloy remains the unique supplier and manufacturer of premium performance steel products.

The firm was founded in Wollongong in 1980. Bisalloy has been thriving since then in the domestic market here in Australia and is developing its international markets through an extensive distribution network in China, Indonesia, Thailand, the U.A.E and South Africa. Throughout the last forty years, the company has established strong long-term relationships with top customers in Australia such as BHP, Rio Tinto, Barrick, and Caterpillar.

Source: Tradingview.com

Bisalloy, a renowned brand synonym of quality

Bisalloy is a name that has gained the reputation of reliability over its decades of existence. Recently, the company decided to exploit its name and promote the brand even further by introducing the “badge of quality” on its products, showcasing Bisalloy build badges on truck bodies and earthmoving attachments to indicate they are made of genuine Bisalloy steel.

The Bisalloy steel range has become renowned for its hardness, impact and abrasion resistance combined with improved wear life designed to perform in the world’s toughest environments. The Bisalloy Built badge is a representation of these attributes providing an unrivalled choice for customers considering their next quenched and tempered steel plate purchase.

We think it is a wise approach to reinforce the brand which is already a synonym for excellence. The idea of the badge is to serve as a quality guarantee of the locally manufactured steel that meets strict Australian standards. Through its brand positioning and its long-term established relationship with key players in Australia’s top industries, we believe, this sets Bisalloy ahead of its competition for some time.

A well-diversified business serving Australia’s top industries

Bisalloy has a portfolio of products organised in four business segments, Bisalloy Wear, Bisalloy Structural, Bisalloy Armour and Bisalloy Protection steel plate. Bisalloy has been one of the key suppliers of quality steel products for what Australia is known for, strong mining, quarrying, exploration, and the construction industry, these are all applications that require high-grade Bisalloy steel products. These industries necessitate a large number of steel products and place high demands on performance steel that can sustain high wear, high impact, lower weight, and abrasion resistance.

Until today, Bisalloy enjoys practically the exclusivity to manufacture and to provide such a product in Australia. Among the company’s many market-leading products, the Wear steel which represents 66% of the business revenue, has become the number one performance steel choice for many industries that require superior hardness, wear, and tear resistance. While the equipment used in mobile mining and fixed crushing applications immediately come to mind as being ideal applications for the Bisalloy Wear product, ground engaging tools such as bucket lips and wear areas, agricultural ploughs, concrete mixers and even garbage trucks all require hard-wearing steel. Quality steel not only makes sure that machines can function more effectively but prolong service life intervals, reducing downtime and maintenance costs. After so many years leading the Australian market in this niche market, we think that Bisalloy’s future is bright following the recent intention from the company to embark in its global expansion. Australia remains Bisalloy’s main market with 83% of the company’s revenue.

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Source: Bisalloy. FY20 sales volume breakdown.

Bisalloy is speeding up its international expansion

The main production site is in Wollongong. The site can produce over 60 thousand tonnes annually that meet the international demands for high-quality standards. Furthermore, since February 2019, Bisalloy has established a co-operative joint-venture with Shandong Steel in China which added an additional 20 thousand tonnes of capacity. Bisalloy’s partnership propelled the Chinese producer to become the second-largest steel company in China. As of FY20, Bisalloy’s sales from export was just 17% of the company’s total revenue, however, we think this number is going to increase rapidly and contribute substantially to revenue growth onward FY21.

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Source: Bisalloy

Company Updates

FY21 onward outlook: Leading Australia’s market while aggressively expanding overseas

We all know how challenging 2020 was for businesses, however, Bisalloy remained strong as steel as the company reported some good results for FY20. Bisalloy continued to progress on its plan and even realised growth during the year, increasing its domestic Australian market share with a 30% surge in sales volumes. Also, Bisalloy exhibited exceptional operational resilience during the peak of the pandemic with minimal to no disruption. FY20 was a very active year for Bisalloy, we saw the company developing relationships and key partnerships with strategic customers and manufacturers. These efforts are building the foundation for the company’s future growth. As a result, Bisalloy realised new strategic and long-term supply agreements along with closer collaboration with its Australian and international distribution network.

In FY21, we expect the demand in Australia to improve in all the major industry segments, mining, quarrying, construction hydro, manufacturing, transport, and defence. The developed partnership strategy with key companies in these industries during FY20 will allow Bisalloy to continue dominating the domestic market for many years ahead in our opinion.

In addition to having a positive outlook on the Australian market, we expect Bisalloy to substantially expand to new markets from FY21 onwards. As of FY20, the defence sector represents merely 2% of the company’s sales volume, however, this might considerably change in the near future. Bisalloy is working with the Australian Government to supply its products in the development of Land 400 vehicles and for the future submarine programme. This could turn out to be extremely profitable for the company.

International expansion is also on the menu. We have seen Bisalloy working closely with the German defence department to promote Australian built defence products which are currently being tested. The company is also expanding into China via its cooperative joint venture. The pandemic caused disruption and affected sales volume throughout FY20, however, the firm was still able to turn a profit which marginally increased. Since the lift of COVID-19 restrictions in the region, strong sales volume came back and is expected to continue onward FY21.

Industry Analysis

59% of Bisalloy’s revenue is coming from the Australian mining sector, hence the importance for us to see the mineral exports recover onward FY21. As the world economy rebounds from the impact of the pandemic, we expect the outlook for Australian mineral exports to progressively improve. Australian miners have found their products in high demand, helped by the effect of government and central bank measures abroad. By the end of 2021, export earnings are projected to reach a record of $296 billion which is marginally better than the record set during the previous period. We are anticipating a steady export over the next five years as the Australian resource sector is set to capture the increasing demand for resources necessary for the development of low emission technologies.

The major risk remains the Pandemic. COVID-19 infections have resurfaced in some countries leading to a slower than expected global economic recovery in recent months. Furthermore, renewed lockdown measures in a few major economies weighed on economic activities hurting particularly the energy sector. Nonetheless, we remain optimistic as many indicators suggest a strong economic recovery to continue to catch up throughout the second half of the year once vaccines are rolled out more broadly across the world.

Stimulus measures promoting infrastructure spending and the reopening of economies is expected to bode well for the materials sector. The demand is likely to sustain for well over a year as economic activity ramps up. These are very good momentums for a firm like Bisalloy. Just here in Australia, specifically Western Australia has been seeing high levels of activity in the materials and mining sector. There is definitely no shortage of tailwinds in the industry.

Investment Thesis

Australia’s Ex-Prime Minister became a substantial holder of Bisalloy

What better than the conviction of an Ex-Prime Minister in a company that is flirting with national defence contracts? On the 10th of this month, Ex-Prime Minister Malcolm Turnbull became a substantial shareholder of Bisalloy. Turnbull took up a 6.38% stake in the company through the acquisition of about 2.9 million shares. Bisalloy is seriously working on its expansion overseas and is particularly targeting the defence sector. If we look back in time in 2018 while Turnbull was still in office, Bisalloy at that time successfully won the bid with German’s Rheinmetall to supply its product for the development of Land 400 vehicles. This piece of insider news gives us strong confidence in the company and we could see Bisalloy’s revenue skyrocket as the firm becomes the key supplier for the German combat vehicles manufacturer.

Six years of consecutive profitability and counting

Bisalloy has an impressive financial track record. The firm reported only positive net income since FY11 except for FY14. You can rest assured that it is likely to continue in the years to come as the company has recently accelerated its global expansion. As of FY20, Australia represents 73% of Bisalloy’s total revenue and we believe this is going to be more balanced as the company is diversifying and entering new markets.

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During the First half of FY21, Bisallow saw its revenue declining by 16.4% year-on-year to $47.2 million from $56.5 million. The cause of the deterioration in revenue was due to the loss in domestic market share to its major competitor despite the anti-dumping measures which came into effect in November 2019. Bisalloy’s competitor circumvents the measures by changing their source of supply from Sweden to the United States. However, we think that this unfortunate situation will not last as the investigation is in progress by the Anti-Dumping Commission and sales volume will resume shortly.

Despite seeing its revenue temporarily decline in its domestic market, Bisalloy continues to improve its profitability with operating EBITDA going up by 42% last year, and net profit after tax up by 54.3% to $3.4 million compared to $2.2 million in HY20. The increase in the company’s margin was supported by the global expansion initiative with strong performance coming from the Chinese joint venture which brought volumes up by 33%. Bisalloy has also maintained profitability with its overseas distribution in Indonesia and Thailand despite relatively weak demand.

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Over the last four years, Bisalloy has consistently improved its finances. We have seen the company’s Earnings per Share (EPS) grow by a CAGR of 49.5% since FY17. Bisalloy is also very good at maximising its assets as we have witnessed a Return on Asset growth of 14.8% CAGR over the last four years. All in all, with many developments in progress in the defence sector, the ongoing global expansion initiative and the resume of global economic activities, we are convinced that Bisalloy will continue to create value in line with its Return on Capital at a CAGR of 27.6% (FY17 – FY20). It is also worth noting that the stable revenue growth along with a consistent improvement in EBITDA margin supports the distribution of a lucrative 4.29% dividend yield. Actually, dividend payout has been steadily increasing year on year.

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With revenue increasing year-on-year at a CAGR of 7.6% along with a spectacular EBITDA margin growth since the last four years we are confident to say that Bisalloy has ample room to further appreciate in the years to come. Looking at the multiples, the firm appears to be fairly valued with an estimated EV/EBITDA of five times for FY20. The ASX 200 index has an average P/E ratio of 22.7 times and an average EV/EBITDA of 14.5 times. Relatively, BIS shares are much cheaper than the premiere index. Bisalloy’s low trading multiples, expanding growth profile, and a terrific return of dividends makes it an opportunity to not miss in our opinion.

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Technical Analysis

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Trend

BIS shares recovered since the COVID-19 global sell-off back to its pre-COVID level of $1.165 per share. The share price has been swinging between $1.54 and 89 cents before finding its price equilibrium in the $1.215 – 1.045 range. Since the beginning of this year, BIS fell from its recent high at $1.5 per share before finding strong support at 89 cents. In the process, the price action formed a bullish pennant pattern which suggests that a breakout is imminent. Hence, the recent support has been found in the beginning of this month around the psychological level of one dollar per share which coincides with the 2.9 million shares purchased by Ex-Prime Minister Turnbull on the 10th of June.

Key price levels

The key level to observe is the nearest resistance level at $1.215 per share. This level is as well the 50% retracement from January-March-2021 swing low. We believe there will be significant consolidation in the $1.25 and 1.14 range as buyers are taking their positions for the next breakout which will lead BIS shares back above our first target of $1.5 per share.

Volume and momentum

Volume slightly decreases since the last 200-day with the 20-day volume average down by -18%. The price action remains bullish in the near term, evolving in a range between $1 and $1.21 per share.

Trade consideration

  • Market participants might be interested to enter a key support level: $1 per share.
  • Primary target price above $1.5 per share
  • Secondary target price at $2.0 per share
  • Consider reducing exposure below 95 cents per share
  • It is recommended exiting the trade below 89 cents per share

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Recommendation

Bisalloy has been around for four decades, being the only Australian company to manufacture high-quality steel products such as high-tensile, abrasion-resistant quenched and tempered steel plates. The company has nearly the exclusivity to supply Australia’s key industry. Recently, Bisalloy has embarked in its global expansion initiative which appears to be extremely promising. With many developments in progress in the defence sector, the ongoing global expansion initiative and the resumption of global economic activities, we are convinced that Bisalloy will continue to create value. It is also worth noting that Bisalloy has an impressive financial track record. The firm has been consistently profitable for the last ten year except in FY14. Bisalloy is also a lucrative dividend stock that currently pays a 4.29% dividend yield. All in all, Bisalloy appears to be at a discount as attested by its valuation multiples, therefore we are issuing a “Buy” recommendation.

 

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