This ASX 200 stock's 'compelling valuation' makes it a strong buy
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Although the Australian share market is trading within sight of its record high, that doesn't mean there aren't any bargain buys out there.
For example, the ASX 200 stock in this article has been labelled as undervalued and tipped to deliver big returns for investors over the next 12 months.
Which ASX 200 stock is cheap?
The stock in question is steel products manufacturer BlueScope Steel Limited (ASX: BSL).
According to a note out of Goldman Sachs, its analysts have reiterated their buy rating on the company's shares with an improved price target of $30.10.
Based on the current BlueScope share price of $20.54, this implies potential upside of approximately 47% for investors over the next 12 months.
In addition, the broker is expecting the ASX 200 stock to provide dividend yields of 2.9% in FY 2024 and 3.4% in FY 2025. This boosts the total potential return to approximately 50%.
Why is the broker bullish?
The main reason that Goldman Sachs is bullish on BlueScope is its US painted steel business. It explains:
BSL began its push into the high growth US painted steel market in 2022 with the acquisition of Coil Coatings making BSL the third-largest painted steel producer in the US. Our analysis of the US painted steel market and BSL's strategy indicates the US painted steel growth opportunity could deliver ~A$400mn (~20%) EBITDA upside.
The broker also highlights that this ASX 200 stock is trading at a significant discount to peers. It adds:
Comp analysis implies BSL undervalued: Despite ~50% of EBITDA being higher margin painted steel by FY28E, BSL trades at ~4x EBITDA vs. US steel peers at ~7-8x, with painted steel company AZZ on ~9x. [â¦] Compelling valuation and FCF: trading at ~0.65x NAV (A$31.7/sh), ~4x NTM EBITDA (vs. 10-yr average of 4-7x), and on a FCF yield of ~6% in FY24E.
Goldman then concludes:
We reiterate our Buy rating on BSL. Our NAV increases by 5% (~A$700mn) to A$31.7/sh after incorporating US painted growth into our base case, and our 12m PT rises by 8% to A$30.1/sh, on the higher NAV and putting the US coated and painted business on 8x (unchanged for Aus, new for US). Although the US growth strategy could take around five years to deliver, BSL already looks undervalued vs. US steel peers, and we believe very little of the potential upside from the US growth strategy is being priced into the stock.
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.