Earnings Report /
Pakistan

Amreli Steel: 3QFY20 preview – Earnings likely to remain in the red

  • For ASTL's 3QFY20 result we expect a NLAT of PKR182mn (LPS: PKR0.61) vs. NLAT of PKR293mn (LPS: PKR0.99) during SPLY.

  • We expect Net Sales to rise 28% yoy to PKR8.2bn on the back of frequent price adjustments during 3QFY20.

  • Gross margins during 3QFY20 are expected to hover around 8.6%, compared to 7.9% in 2Q (4.9% SPLY).

Intermarket Securities
26 April 2020

In Amreli Steel’s (ASTL) 3QFY20 result, we expect a NLAT of PKR182mn (LPS: PKR0.61), compared to a NLAT of PKR293mn (LPS: PKR0.99) in the same period last year, taking cumulative 9MFY20 NLAT to PKR496mn (LPS: PKR 1.67), compared to a NPAT of PKR224mn (EPS: PKR0.75) during SPLY.

We expect Net Sales to rise 28% yoy to PKR8.2bn on the back of frequent price adjustments during 3QFY20. As per our channel checks, the average ex-mill price was c.PKR108,000/ton, which was an increase from realized in the previous quarter/last year. Volumetric sales, on the contrary, were constricted on account of suspended operations in late March 2020, coupled with the breakdown in ASTL’s rolling mill, expected to lead to lost rebar production of c. 8,000tons. However, we believe its effect was negated by higher rebar prices during the quarter – hence, our expectation of sequential revenue growth.

Gross margins during 3QFY20 are expected to hover around 8.6%, compared to 7.9% in 2Q (4.9% SPLY), owing to improved sales alongside a stable PKR/USD rate for the greater part of 3QFY20. We expect that sufficient raw material inventory (imported scrap), bought on pre-depreciation rates – in tandem with price increases – will help lift margins qoq. 

Finance cost is expected to remain high due to excessive borrowing, up 58% yoy. The impact of several rate cuts in March 2020 will be fully realized during 4QFY20, providing a much-needed breather.

We believe that ASTL will avail tax credit under section 65(e) during 3QFY20, similar to the previous two quarters. 

Presently rebar prices stand at PKR118,000/ton due to limited supply, in light of halted operations. We expect volume sales to remain subdued during 4QFY20 given the backdrop of a sharp economic slowdown. A modest recovery in demand may be witnessed post FY20, once Covid-19 outbreak subsides. Note that the government has already announced a Construction Package to stir activity. However, new capacities in the rebar industry could check growth initially in a post-Covid environment, in our view. We are Neutral on the stock.