Amreli Steels Limited (ASTL) is scheduled to announce its 3QFY17 results on 20th April 17, wherein we expect the company to post earnings of PKR315mn (EPS: PKR1.06), down 15% YoY from PKR372mn (EPS: PKR1.25) in SPLY. This would lead 9MFY17 earnings to PKR797mn, down ~9% from PKR880mn during 9MFY16. The drop in profitability is on account of lower margins due to higher scrap costs (9MFY16 USD201/ton vs. 9MFY17 USD241/ton) during the period. However, on a quarterly basis, we expect margins to improve to 19% vs. 17% 2QFY17 on account of an increase in selling prices by ~5%. Also, we expect the quarter's sales volume to grow by ~5% compared to 2QFY17, as i) the trading inventory has finally cleared up allowing the mill to satisfy all demand from its own billets, and ii) demand is higher during 2H due to a construction friendly weather.
Amreli Steels Limited (ASTL) is scheduled to announce its third quarter earnings on April 20, 2017. We expect the company to post earnings growth of 19% on a QoQ basis to clock in at PKR 1.03/share. While we expect the topline to witness negative growth by 7% QoQ on account of exhaustion of trading stock, decline in cost of sales due to lower international scrap prices is likely to be key catalyst in propelling earnings. Our December 2017 target price of PKR 87 gives a downside of 5.6% to ASTL’s last closing price, hence we are maintaining a neutral stance on the stock
We expect the company to produce around 41,000 rebars, taking its rebar utilization to 91% in the quarter under review. Furthermore, the company has also escalated its rebar prices, taking its average price to PKR 76,000/MT in 3QFY17 from PKR 73,000/MT in the last quarter same year. However, the company exhausted most of its trading stock in the last quarter, whose absence is likely to plunge topline growth by 7%.
Since procurement of scrap constitutes around 40% of costs of sales, decline in international scrap prices by 10% QoQ is likely to increase gross margins of the company to 19% as compared to 17% posted a year back.
ASTL is scheduled to announce 3QFY17 result on Apr 20'17 where we expect earnings to decline 25%YoY to PkR280mn (EPS: PkR 0.94) primarily due to: 1) deterioration in gross margin by 416bps YoY (3QFY17F GM: 18.24%) following increase in input prices (MBSF Index up 39%YoY) despite 16%YoY increase in revenues and 2) normalization of effective tax rate to 23% (vs. 16% in 3QFY16). However on a sequential basis, GMs are likely to see improvement by 101bps QoQ in view of surging re-bars prices (+11%QoQ) and ending of low-margin trading stock. This alongwith 2%QoQ topline growth is likely to assist earnings growth of 9%QoQ in 3QFY17. On a 9MFY17 basis, earnings are expected to remain suppressed at PkR766mn (EPS: PkR2.58), a decline of 17%YoY, predominately on the back of higher input prices (+16%YoY in the period) despite our estimated 19%YoY growth in topline. With 42%CYTD return, ASTL currently trades at a FY17P/E of 27.38x where our DCF based TP of PkR80/share offers 15.5% downside, implying a reduce stance.
Amreli Steels Ltd. (ASTL) recently held analyst briefing to discuss 3QFY17 results and shed light on second phase of expansion plan (270ktons rolling and 200ktons melting).
Although organic growth is driving sales, decline in rebar prices has kept topline growth in check.
Trading business has kept gross margins in check, although company guided that gross margins in the range of 17%-19% are a fair estimate, going forward.
Company announced second phase of expansion which is expected in FY18. While ongoing expansion will likely come online by Nov'17. Tax benefit due to the expansions should also support bottom-line going forward.
Key risks ahead include (i) volatility in international steel prices (as China aims to cut production), ii) delay in COD of expansion and iii) adverse decision on duty by govt.
Decline in gross margins in 3Q
ASTL reported 3QFY17 earnings of PKR337mn (EPS PKR1.1) in 3QFY17, showing a decline of 9%YoY. Despite 12%YoY topline growth, earnings remained in check due to 2.4ppts reduction in gross margins and higher effective tax rate of 23% (compared to 16% same period last year). For 9MFY17, earnings declined 11%YoY to PKR819mn (EPS PKR2.8) as gross margins fell 5.7ppts; although 32%YoY reduction in finance cost supported bottom-line to some extent.
Topline growth stymied by prices:
As per details shared by the management, company sold 47.2ktons of rebar in the outgoing quarter, up 32.1%YoY. However, ~8%YoY decline in average price in the quarter for produced rebars kept topline growth in check. A similar scenario can be seen in 9MFY17 - sales volume was recorded at 124.7ktons, up 20.4%YoY, but ~10%YoY decline in average price hindered topline growth.
Stability in margins expected ahead:
Although gross margins have been lower at 17.2% compared to last year’s 22.9%, management has guided that margins in the range of 17% - 19% are suitable projections for the upcoming years. In the outgoing quarter, company's margins remained under pressure mainly due to its trading business. To point out, company undertook trading of rebars by buying inexpensive Chinese rebars being imported into the country and subsequently selling them. As per management, it was never their aim to profit from the trading business rather they wanted to remove excess volume from the market. For core operations, margins are expected to stay fairly stable in the foreseeable future, unless there is a severe disruption in international scrap market.
Second phase of expansion announced
In a recent notice at PSX, company announced further expansion at both SITE and Dhabeji which would take cumulative Rolling and Melting capacity to 750ktons and 600ktons, respectively. Company will be adding rolling capacity of 145ktons at SITE (taking cumulative capacity there to 325ktons), and will be increasing Rolling and Melting capacity at Dhabeji by 125ktons and 200ktons, respectively (taking total capacity there to 425ktons/600ktons). This is expected to come online in FY18. The new expansion will likely be financed by both debt and internal cash generation, although the proportion between the two has not been finalized. The ongoing expansion (undertaken from IPO proceeds), is expected to come online by Nov'17; although the Meltshop will likely be completed by Jul - Aug'17, company does not intend to produce Billets and sell them in the market (company manufactures a particular cross section of Billets which is not demanded locally), rather they will run tests in order to ensure successful hot link when Rolling Mill comes online. Post expansion, company would require 55MW of electricity for which they have a contract in place with KEL.
Tax benefit in play:
As per management, company's effective tax rate is expected to remain low going forward as it is enjoying tax credit on expansion undertaken from IPO proceeds. Moreover, they have highlighted that the second phase of expansion will be financed in a way which will enable the company to enjoy maximum tax benefit.
The scrip is currently trading at FY17F P/E of ~25x compared to 19.5x of the steel sector. The market is likely pricing in organic growth after expansion comes online coupled with overall economic growth on the back of infrastructure spending. We flag i) volatility in international steel prices (as China aims to cut production), ii) delay in commercial perations of expansion and iii) adverse decision on duty by govt. as key risk to investment.
ASTL announced its results for FY17 on 28th August, where EPS clocked in at PKR 3.62, down by 16% YoY. 4QFY17 EPS clocked in at PKR 0.86, down by 36% YoY. The company announced a final cash dividend of PKR 2.0/ share.
Sales declined by 12% QoQ owing to decline in volumetric sales in Q4FY17 by 19% QoQ (38,400MT) mainly due to transportation strike and partially by plant shutdown (four days in June) amounting to the loss of 8000MT of production.
Company also witnessed high tax expense owing to super tax. However, tax credit from IPO (10% tax credit) and 65E (tax credit liable for 5 years on a project financed 70% by equity) is expected in FY18 (commencement of 200k tons of melting and 150k tons of rebar).
Speaking about future prospects, management revealed that company has been pre-qualified for supply of rebars for the construction of Dasu Dam, where approx. 8k tons of rebars per month of demand is estimated for the next 8 years. The sales for the project are likely to begin from March’18. Other than that, company is hopeful that expected imposition of anti-dumping duty on rebars and upcoming mega projects (Karot dam) will keep the demand growth at higher pace.
The capacity of re-rolling mill (425k tons) will come online in November’17 and further expansion of 145k tons will come online in mid of FY18-19, taking total re-rolling capacity to 750k tons. Whereas, COD of 200k tons of melting capacity has been announced and further expansion of 200k tons will come online in FY17-18, taking full capacity of melting to 600k tons. Financing for 200k tons of billet expansion in Dhabeji will be financed 90% from debt (PKR 900mn) and rest from internal sources.
It is to be noted that along with the current shut down of the plant for 15 days, plant is scheduled to see another one time shutdown of 15 days next month (September). However company has built inventory from excess billet production to be utilized then.
Volumes grew by 60% YaY to 277k tons in FY19. Albeit, earnings declined amid shrunk margins due to costs associated with the new plant, PKR depreciation and augmented financial charges.
Non-controllable factors for the company include PKR depreciation, interest rates and steel demand.
The management of ASTL expects further devaluation in the Pak Rupee which can trigger cost push inflation and may hurtthe capacity to pass through costs.
Interest rate cuts may not materialize in the immediate term post latest inflationary readings. The company believes that the current rates are not sustainable but has assumed them to stay constant for naw. If the interest rate goes back to a singledigit, it will benefit demand.
On the demand side, buyers still appear skeptical. However, the company has aggressive plans. Currently turnover tax on steel distributors is 1. 25%, which is unacceptable so the company has leveraged its position to have the government reverse this; it is an ongoing discussion n. In addition, high rise buildings have once again been allowed as the government was pressurized from across the board. This will be a goad activity generator for the sector.
Pakistan does not have a recycling policy like india. This is a long bet but it can also augment demand.
On the supply side, Naveena is expected to come online in 1QCY20 but it takes time to undergo a learning curve cycle (which can last up to 2 years) and achieve apumum levels. Initially the supply from Naveena can be up to 8-9, 000 tons per
month. At the same time, Mughal is also expanding. However, some other plants in the sector have been terminated while
shut down of the ship breaking industry has also opened up an opportunity for quality steel rebar manufacturers.
Smuggling from Iran has also been curbed due to patrolling at the border post FATF, this bodes well for the sector. Despite
being low in quantity, these rebars disrupt the market due to cheaper prices amid availability of cheap gas.
The company is targeting to sell 350k tons per annum. ASTL sold 65k tons in 1 QFY20 so the target is tough but the companyremains focused.
Scrap prices will slightly go up in winters as production goes down globally. Although this is not necessary due to the US-
China trade war and other European issues (Brexit) but the company expects scrap prices to range between USD 275ltonto USD 350/ton.
Amreli continues to increase its foot print across the country whereby it believes it is easier to expand to North compared ta
South as that is a bigger market. 80% of the steel in Pakistan is manufactured and sold in North (there are close to 300
steel re-rolling companies in Pakistan). South market is of 800-sook tons per annum, the remainder is North market ; totalmarket size is 4mn tons.
Prices are slightly lower (-PKR 4, 000 per ton) in North hence some players in North want to come to South. However, it's
hard to penetrate south market given smaller size. Amreli happens to be a price leader in North and in the medium to longterm the company plans to augment its market share in North from 1. 7% to 5%.
[t is currently a buyers'market so the company cannot increase prices, however, costs will come down as volumes growand this will translate to improved profi tability.
Margins of ASTL going forward depend on utilization of the plant. So when volumes expand to optimum levels, costs willcome down by PKR 3-3, 500 per ton automatically.
[n order to avoid additional costs post axle load criteria, the company can also opt to send rebars to North via rail.
Moreover, receivables of ASTL have gone up to PKR 4bn but the company plans to eventually bring them down to PKR3bn.
*BMA Capital Management* hosted a webinar on *Steel Sector* today where we invited *Mr. Fazal Ahmed, COO & CFO of Amreli Steels Limited (ASTL)* to discuss the outlook of the sector in the backdrop of COVID-19 pandemic. Key takeaways from the session are given below:
The company reported a loss of PKR 688mn against profit after tax of PKR 224mn in the same period last year. Gross margins during 3QFY20 declined by 147bps to 6.4%. This compression in gross margin was primarily attributable to: 1) Industrial Support Package (ISPA) and Fuel Charges Adjustment (FCA) charge by K-Electric; 2) production loss of around 10 days; and 3) higher input costs. Our speaker also shared that the benefit of lower scrap prices was largely offset by the PKR devaluation during the period under discussion. However, the impact of lower international scrap prices may take up to 3 months to reflect in the results.
ASTL recorded a surge in distribution cost (up 23% YoY) as it increased its sales footprint to 105 cities. Other charges also remained elevated at PKR 129mn compared to PKR 7mn in the previous quarter. This jump in other expenses was on account of PKR depreciation during the quarter.
Loss of production during the quarter is estimated to be ~10,000 MT as the company recorded sales of ~80,600 MT in 2QFY20 against the estimated production of over ~90,000 MT. Sales of Prime Bars during 9MFY20 clocked in at 221,179 MT compared to 180,622 in the same period last year. Ongoing lockdown situation due to COVID-19 pandemic is also estimated to take its toll on the ongoing quarter.
Industry demand in FY21 is likely to grow by 5% to 4.02mn MT from the current market size of 3.83mn MT where the north region is expected to account for 82% of the total sales.
Key challenges that the sector currently faces include: fragmented structure; high share of undocumented production units; and higher tax incidence
Speaker also shared that the construction package may generate some additional demand in FY21, however, total demand is estimated to grow by 5% in FY21.
Management believes that the commissioning of additional capacity from other players is unlikely to create pricing pressures in the industry.
ASTL’s current cost of electricity hovers around PKR 16.1/Kwh opposed to PKR 12.8/Kwh which may further increase up to PKR 19/Kwh. The company may consider generating its electricity over a while due to increasing cost.