International Steels Ltd (ISL) has posted a NPAT of PKR1.6bn (EPS: PKR3.58) in 2QFY22, down a sharp c.30% yoy and c.40% qoq. The 2Q result has come in much lower than our projected EPS of PKR4.77, with major variance stemming from lower revenues. This takes 1HFY22 EPS to PKR9.71, up c.50% yoy. ISL also announced an interim dividend of PKR2.0/sh (in line with estimates).
Key takeaways from 2QFY22 results:
Net revenue has clocked in at PKR18.8bn, up a mere c.5% yoy, lower than our expectation of c.PKR25bn, amid lower than expected sales volumes, in our view, despite healthy production volumes from the autos and white goods industries. Flat steel prices increased by c.60% yoy to PKR205,000/ton. We highlight that the decline in volumes may have instigated the reduction in CRC prices in December, in our view.
ISL has posted gross margins of c.15% in 2Q, down c.5ppt yoy, slightly higher than our expectations. The sequential yoy decline in margins emerged from moderating inventory gains, which likely may have turned into inventory losses, during the quarter (HRC prices declined by 10% qoq). In 2Q, CRC-HRC spreads averaged c.US$110/ton, down c.20% yoy.
Distribution and Administration expenses have come in at PKR217mn (up c.40% yoy) and PKR80mn (up c.10% yoy), respectively. Higher distribution expenses can be explained by greater transport costs both locally and globally (sea freight), in our view. We await availability of quarterly accounts for further clarity on these items.
Finance cost has more than doubled yoy, largely attributed to rising borrowing costs (higher Kibor rate) and exchange losses, in our view. The effective tax rate is 24% in 2Q.
ISL has posted a weak result, because of sluggish sales despite healthy production in the autos and white goods sectors, while margins sequentially declined amid moderating inventory gains, in our view. The sharp c.8% yoy PKR/USD depreciation and declining CRC-HRC spreads (currently below US$90/ton) are likely to keep margins in check in the coming quarter. The planned backward integration into an HRC plant and potential maiden Steel policy are key triggers for both stock price and profitability, in our view. We thus have a Buy rating on the stock with a June 2022 TP of PKR110/sh.