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Amreli Steel: 3QFY21 review – Higher-than-expected gross margins led to earnings beat

  • Earnings beat on the back of higher-than-expected gross margins
  • Inventory gains as the company acquired scrap at c.US$350/ton compared to 3QFY21 average scrap price of US$440/ton
  • We expect positive demand momentum to continue
Amreli Steel: 3QFY21 review – Higher-than-expected gross margins led to earnings beat

ASTL has posted a NPAT of PKR503mn (EPS: PKR1.69) for 3QFY21, compared with a NLAT of PKR374mn (LPS: PKR1.26) in SPLY, and up 60% qoq. This has taken aggregate 9MFY21 NPAT to PKR926mn (EPS: PKR3.12) compared with 9MFY20 NLAT of PKR689mn (LPS: PKR2.32). The 3Q result came above our projected EPS of PKR0.76, where the variance emanated majorly from higher-than-expected gross margins (potentially due to scrap bought at lower prices in the previous quarter) and a lower- than-expected tax rate.

Key takeaways

  • Revenue has clocked in at PKR9.7bn (up 26% yoy and 2% qoq), where the yoy increase can be attributed to (i) higher sales volume, Coming from a low base, and (ii) higher rebar prices as global scrap prices have surged recently. The revenue was below our expectations, however, most likely due to lower-than-expected volumes.

  • ASTL has posted gross margins of 13.9%, well above our expectation of 10.5%. This can be attributed to inventory gains (international scrap prices rose c.30% qoq) as the company acquired scrap at c.US$350/ton compared to 3QFY21 average scrap price of US$440/ton. Gross margins rose by a staggering 7.5ppt yoy and 3ppt qoq.

  • The other major deviation stemmed from the company availing a tax credit of PKR95mn and having an effective tax rate of 12.5% as the company availed tax credits in line with income tax ordinance 65e, on production at its dhabeji plant. Distribution and Administrative expenses clocked in at PKR216mn and PKR133mn respectively, in line with our expectations.

  • Finance cost came in at PKR395mn, in line with our estimates, down 32% yoy due to lower interest rates.

The result is impressive and has exceeded our expectations; however, we believe that such high gross margins are unsustainable, as inventory gains will be non-recurring as international scrap prices normalise. Local rebar prices will also decrease in line with scrap prices. In the medium term, however, robust demand from the construction space is expected to enable ASTL to pass on any increase in scrap prices. We thus have a Buy rating on the stock with a June 2022 TP of PKR60.0/sh.


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