ASTL posted a loss of PKR509mn (LPS: PKR1.71) for 4QFY22, down from a NPAT of PKR531mn (EPS: PKR1.79) last quarter. This has taken FY22 NPAT to PKR1.3bn (EPS: PKR4.61), c.3% down from SPLY. The announcement is against our positive earnings expectation of PKR1.23/sh, with major deviation stemming from a variance in volumetric sales, PKR devaluation affected scrap costs, and blistering electricity cost related Fuel Cost Adjustments (FCA). Recent adverse monsoon spells have put ASTL to reduce prices in an attempt to overcome corrosion in finished ferrous products. The company outlook is also dampened by lower demand and surging finance costs. We blend a mix of result review and analyst briefing takeaways below:
Underachievement of sales target in 4Q
Revenue has clocked in at c.PKR15.6bn (down c.2% QoQ), lower than our expected revenue of PKR17.5bn, where the deviation is led by lower than expected volumes. The management in their corporate briefing session revealed that 4Q volumes have clocked in at c.88k tons, against our expected volumes of c.94k tons. The company revealed that their target for 4Q was set at 115,000mt, but were unable to achieve their goal due to heavy and prolonged monsoon spells coupled with political instability and fiscal tightening.
The total volumetric sales for FY22 accumulated 370,075mt compared to 157,181 in FY21. Moving forward the management has given a bleak outlook for the upcoming quarters in terms of volumetric sales similar to the cement industry.
High scrap costs continue to dent margins…
Scrap costs have jumped c.9% QoQ to USD600/mt during 4Q, further aggravated by PKR devaluation of c.10%. Highly volatile commodity prices and orders being placed 90 days in advance the company has to be extremely prudent and calculated with their purchasing of scrap. Though currently scrap prices have let off averaging c.USD520/MT (Jul-Aug’22), the company is still holding a large amount of inventory at a higher price due to their high estimated sales for 4QFY22.
…and so does expensive electricity
A major point of concern regarding the company’s COGS in the current quarter and moving forward into the next fiscal year is fuel and energy cost. After raw material the second most cost intensive line item is power and fuel (16% of COGS) which was one of our major deviations.
The management apprised about payment of PKR30/unit for electricity due to blistering Fuel Cost Adjustment (FCA) for 4Q. For just May’22 and Jun’22, the company paid FCA of PKR9.5/unit and PKR 11.37/unit, respectively, accumulating to PKR488mn. ASTL margin dropped significantly to 8.9%, down c.3ppt QoQ (4Q expectation: 12.2%). At current levels of oil prices, it is difficult to see light at the end of the tunnel as FCA is expected to continue to increase further, underpinned by recent PKR devaluation.
Distribution and administrative expenses clocked in at PKR393mn and PKR225mn, up 38% and 139% YoY, respectively. Rise in the former is likely due to rising retail fuel prices of petroleum products. The latter is coupled with aggressive marketing campaign coined towards the reliability of graded steel.
Interest burden will likely increase
Finance cost has come in at PKR798mn for the period under review, up 23% QoQ, likely due to a rise in short term debt (in tandem with sales). Amreli’s FY22 finance cost has come in at PKR2.3bn which is set to double in the upcoming fiscal year if KIBOR rates remain at current levels. Borrowing cost (KIBOR increased by 322bps in 4QFY22 to 14.56% from 11.34% last quarter) which is a major concern as the company holds c.PKR20bn in debt of which only PKR1bn is though TERF.
This is the highest quarterly loss behind that of 4QFY20 (LPS: PKR 1.48) experienced during the pandemic lockdown. Decent volumetric offtake was witnessed notwithstanding subdued construction activity, high scrap and fuel costs. However, the recent decline in scrap costs bodes well for margins but will likely be offset due to reduced rebar prices, higher price inventory being carried forward, elevated power and finance cost. Forced rebar selling at lower rates recently, has largely been due to ongoing monsoon season, which is corrosive for finished ferrous products.
Moreover, a decrease in construction activity amid negligible focus on government infrastructure spending, elevated construction cost, and high FCA in FY23, continues to dampen the outlook.