We expect Mughal Iron & Steel Industries Ltd (MUGHAL) to announce its 3QFY17 results soon wherein the company is expected to etch a PAT of PKR270mn (EPS: PKR1.07), compared to PKR170mn (EPS: PKR0.68) posted in SPLY. This would take 9MFY17 earnings to PKR745mn, up 14% from PKR652mn during 9MFY16. We expect sales revenue to stay relatively flat YoY & QoQ as capacity utilization remains an issue on the back of insufficient power availability from the grid. Also, margins are expected to remain flat at 10.5% for 9MFY17 vs. 10.37% during 9MFY16 as price changes during the period offset increase in scrap costs. Looking forward, we remain positive on MUGHAL as it puts the rights issue to use in order to solve prevailing power woes for good, allowing its mills to roll at high utilization rates.
MUGHAL: BMR with power availability to result in earnings accretion, Revised to "HOLD".
We revise our recommendation on MUGHAL to “HOLD” based on Dec’17 Target Price (TP) of PKR 89/share, implying a downside of 2.8% from last day closing of PKR 91.1/share along with a dividend yield of 3.0%.
Our hold stance on the scrip is based on (1) Improving utilization levels due to expansion of in-house power generation (2) BMR of existing rerolling mill resulting in available capacity enhancement of rebar by 124% to 730k MT and (3) surge in local steel demand courtesy CPEC and high PSDP allocation. We believe that the scrip has already priced the effect of CAPEX justifying our hold stance.
We expect EPS to grow at a CAGR of 16.7% for the period FY18-21, driven by growth in the topline by 15.0% over the same period.
Key risk to our call includes; extension of power outages, reduction in import duties and lower than expected growth in domestic rebar demand.
MUGHAL Results Preview: FY17 EPS is estimated at PKR 7.24, up by 7% YoY
MUGHAL is scheduled to announce its FY17 results on 18th September 2017. The PAT in FY17 is anticipated to be PKR 957mn as against PAT of 893.4mn in FY16, up by 7.1%. The increase in income is attributable to decrease in finance cost by 52.8% YoY owing to repayment of long term loan and utilization of available tax credits. We expect the company to announce a final cash dividend of PKR 1 per share, taking full year dividend to PKR 3 per share.
Topline in 4QFY17 is expected to decline by 2% QoQ on the back of declining construction activities in Ramadan (FY17E effective capacity utilization of rerolling mill: 66%). However gross margins are likely to marginally drop and clock in at 10.1% in 4QFY17 owing to pressure from increasing international scrap prices. The average gross margin for FY17 is expected to clock in at 10.1% whereas, EPS for 4QFY17 is anticipated to be PKR 2.3, up by 47% YoY.
We maintain our BUY recommendation on the scrip with revised Dec’17 TP of PKR 90, implying an upside of 44.7% along with dividend yield of 4.9%.
MUGHAL: 3QFY20 EPS clocked in at Rs0.13, down 91% YoY
Mughal Iron & Steels Ind Ltd (MUGHAL PA) profitability clocked in at Rs33mn (EPS Rs0.13, down 91% YoY) in 3QFY20 against Rs362mn (EPS Rs1.44) in 3QFY9, taking 9MFY20 profitability to Rs400mn (EPS Rs1.59), down 63% YoY.
Result is above our expectation due to higher tax credit availed by the company. Impact
We attribute decline in profitability to (1) company’s inability to pass on the impact of higher input cost, (2) increased finance cost due to higher working capital requirement and capex, and (3) higher admin expenses due to company focus on increasing its geographical presence.
Furthermore, company’s gross margins decreased by 3.2ppt YoY to 8.8% in 3QFY20. We attribute this decline to (1) increased competition in north market given induction of new capacities and increased penetration by south based players, (2) rupee depreciation of average 11% YoY, and (3) 7% YoY increase in scrap prices in US$ terms.
To highlight, company’s finance cost increased by 140/47% YoY/QoQ in 3QFY20 due to (1) Rs160mn loss on translation of foreign currency debt as rupee has depreciated by 7% QoQ against US$ and (2) increased debt amid higher interest rates. Moreover, MUGHAL total debt stands at Rs11.8bn at the end of 3QFY20.
Moreover, among other heads company’s admin expenses were up by 27% YoY in 3QFY20 due to increased geographical presence in our view.
Furthermore, MUGHAL distribution expenses reduced by 47% YoY in 3QFY20 due to decline in advertisement campaigns of MUGHAL Supreme, in our view.
Furthermore, company booked Rs47mn tax credit in 3QFY20, that provided further support to the bottom-line. Outlook
We have an Outperform stance on the scrip with Dec-20 TP of RS57/sh. However, we expect that the near future would be very challenging for the MUGHAL due to nationwide lockdown in order to fight COVID-19. However, relief measures introduced by SBP including loan principal relaxation and changes in framework would provide some ease to sector’s profitability and liquidity position.