Returns on Capital Paint a Bright Future For Bisalloy Steel Group (ASX: BIS) – “BUY” recommended

Bisalloy Steel Group Ltd delivered a solid financial performance for the year ended June 30, 2024 (FY24), demonstrating resilience and profitability despite marginally lower revenue figures. The company’s total revenue came in at $152.9 million, a slight dip of 0.18% compared to the previous year’s $153.1 million. However, this small decrease in sales did not hinder Bisalloy’s ability to significantly improve its profitability, with net income rising by an impressive 23% to $15.7 million. This growth in profit showcases the company's ability to manage its costs effectively and maximise its margins despite a relatively flat top-line performance. Earnings per share (EPS) for FY24 rose to 33 cents, an increase from 27 cents in FY23, further indicating Bisalloy’s strong operational performance. The company’s focus on operational efficiency, alongside its strategic positioning in high-demand sectors such as mining, mineral processing, defence, and construction, has proven to be key in achieving these results. Its products, which include wear-resistant and high-tensile steel, remain in high demand across Australia, Indonesia, and other key international markets, providing a stable platform for ongoing growth. Investors would be pleased with what's happening at Bisalloy Steel Group. Over the last five years, returns on capital employed have risen substantially to 25%. The amount of capital employed has increased too, by 124%. So we must be inspired by what we're seeing at Bisalloy Steel Group thanks to its ability to profitably reinvest capital. From the BIS annual report for FY24, it can be noticed that the company's ratio of current liabilities to total assets decreased to 29%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business’ underlying economics, which is great to see. Looking ahead, Bisalloy Steel Group is well-positioned to capitalise on its diverse product offering and geographic footprint, particularly in sectors with high growth potential such as defence and heavy engineering. These positive financial results, alongside a disciplined approach to market expansion, suggest that the company is poised for continued strength in FY25 and beyond.

We are issuing a “BUY” recommendation for Bisalloy Steel Group following its strong FY24 performance, supported by solid growth prospects and a compelling valuation relative to its peers. The company’s focus on key sectors such as mining, defence, and heavy engineering positions it well for future growth, making it an attractive opportunity for long-term investors. Key Growth Drivers Bisalloy Steel Group continues to capitalise on its leadership position in the high-tensile and wear-resistant steel market. Its diverse product portfolio, catering to sectors like mineral processing, mining, and defence, ensures steady demand, even in challenging market conditions. With net income increasing by 23% in FY24, the company has demonstrated its operational efficiency and ability to enhance profitability, even with flat revenue. The company is also well-positioned for further expansion, particularly in international markets such as Indonesia and Thailand, where demand for its specialty steel products remains robust. Furthermore, its strong balance sheet and stable dividend policy add to its appeal for income-focused investors. Valuation Considerations At present, Bisalloy is trading at a P/E ratio of 10.3x, which is in line with GR Engineering Services Limited (ASX: GNG) and significantly higher than Capral Limited (ASX: CAA) with a P/E of 5.5x. While Bisalloy’s P/E ratio is relatively higher than Capral, its exposure to diverse and resilient sectors like defence and mining justifies this premium. Additionally, Bisalloy’s EPS growth over FY24 further underscores its solid fundamentals, suggesting that its current valuation still presents upside potential. To estimate Bisalloy’s fair value, we employed two valuation models: 1) 5-Year Discounted Cash Flow (DCF) Growth Exit Model - Using a discount rate of 8.8% and a perpetuity growth rate of 1.5%, the model estimates a fair value of $4.51 per share. This valuation highlights the company’s long-term cash flow potential, particularly as it continues to optimise operational efficiencies and expand into new markets. 2) Dividend Discount Model (DDM) Multi-Stage Approach - With the same discount rate of 8.8% but a more conservative perpetuity growth rate of 0.5%, this model suggests a fair value of $3.58 per share. This conservative valuation reflects Bisalloy’s stable but relatively modest dividend growth potential over time. Taking the average of both models, we arrive at a target price of approximately $4.05 per share, representing a +20% upside from the current trading price of $3.37. This suggests that the market may be undervaluing Bisalloy’s long-term growth prospects. Given these factors, alongside an estimated 20% upside in the stock price based on fundamental analysis, we maintain a “Buy” recommendation. Long-term investors seeking exposure to the specialty steel market should consider this stock as a valuable addition to their portfolio.

For the financial year ended 30 June 2024, Bisalloy Steel Group delivered steady results, marked by a slight revenue decline and notable profit growth. The company reported revenue of $152.9 million, almost flat compared to $153.1 million in FY23. However, the Earnings before Interest, Taxes, Depreciation and Amortisation excluding unusual items (EBITA) increased significantly to $23.08 million, up from $19.20 million in the prior year, reflecting a 16% growth in profitability. This improvement highlights the company's enhanced operational efficiency despite market challenges. Bisalloy’s balance sheet remains strong, though net debt slightly increased. As of June 2024, the company’s Debt to Common Equity remains conservative at 1.5%, supporting ongoing capital expenditures and strategic investments. The increase in net profit has resulted in a solid profit margin of 10%, up from 8.4% in FY23​. The group saw a modest decrease in free cash flow by approximately 5%, in part due to its continued investment in capacity expansion and efficiency improvements. Gross capital expenditure stood at $15.4 million, a reduction from the previous year as the company moderated its expansion-related spending. The company's strategic investments remain focused on optimising production capacity and meeting growing demand in international markets. Segment Performance 1) Wear and Structural Steel - This core segment, which serves industries such as mining, construction, and defence, continued to generate strong demand. Bisalloy’s specialty steels, including abrasion-resistant and high-tensile plates, maintained high levels of customer interest, especially in the defence sector, where the company sees significant long-term opportunities. The company has been able to maintain its leadership position in Australia while expanding its footprint in international markets like Indonesia and Thailand. 2) Armour-Grade Steel - The demand for Bisalloy’s armour-grade steel products remained stable, particularly in defence-related projects. Despite global headwinds affecting the broader commodity markets, this segment delivered consistent returns and is poised for future growth as government defence projects continue to ramp up. Overall, Bisalloy Steel Group’s FY24 results showcase its ability to maintain financial stability through a strategic focus on operational efficiency and targeted global expansion, particularly within the defence sector.

In FY24, Bisalloy maintained its commitment to delivering shareholder value through consistent dividends. The company declared a fully franked dividend of 20 cents per share, offering an attractive yield of around 5.6% at current share prices. This payout represents the company's confidence in its strong cash flow and profitability despite the modest dip in revenue.