Equity Analysis /
Pakistan

International Steels Ltd: Dollarized spreads is a key defensive attribute

  • We resume coverage on ISL with a Buy rating and a June 2023 TP of PKR93/sh.

  • We have assumed average spreads of US$80/85 per ton for FY23/24f – slightly below the prior 5yr average of c.US$90/ton.

  • ISL is trading at a FY23f P/E of 4.1x, below the avg c.4.6x and c.5.2x for our Cement and Steel coverage, respectively.

Ali Aziz Soorty
Intermarket Securities
31 March 2022
  • We resume coverage on ISL with a Buy rating and a June 2023 TP of PKR93/sh. In the face of macroeconomic headwinds, ISL’s profit should be cushioned by (i) CRC-HRC spreads holding steady in the medium term, and (ii) sustainable demand from the Appliances industry, in our view.

  • Global CRC-HRC spreads will benefit from the disrupted supply of steel amid the Russia-Ukraine conflict and the big addition of HRC capacities in China. Hence, we have assumed average spreads of US$80/85 per ton for FY23/24f – slightly below the prior 5yr average of c.US$90/ton.

  • ISL is trading at a FY23f P/E of 4.1x, below the average c.4.6x and c.5.2x for our Cement and Long Steel coverage, respectively. We think the market is not appreciating the relative merits of the company – hedge against PKR/USD and lower exposure to the construction cycle.

Resume coverage with Buy

We resume coverage on International Steels Ltd (ISL) with a Buy rating and June 2023 TP of PKR93/sh. In the face of weak macroeconomic conditions in Pakistan and a slowdown in overall demand, we think two factors are supporting the profitability of Flat steel industry in Pakistan. First, global CRC-HRC spreads remain around US$90/ton as sanctions on Russia and increased HRC supply in China continue to pose supply issues for global steel market. Second, downside protection to domestic sales should come from the Appliances industry – of which sales are up c.26% yoy in 7MFY22 – as it is benefiting from weaker competition from imports amid PKR depreciation and hefty global freight. Hence, we expect a mild decline in earnings for FY23f of about 6% yoy. A key near-term catalyst for ISL will be the completion of the debottlenecking project – which will lead to c.120,000 tons pa or 12% additional capacity and is planned to be operational by August 2022.

Global CRC-HRC spreads should remain healthy medium-term

Global CRC-HRC spreads recovered sharply by c.40% yoy in FY21 to an average level of c.US$110/ton (compared with an average US$90/ton in the previous five years). During 1HFY22, the spread held up to average c.US$110 per ton. Since January 2022, however, spreads have contracted to under US$100/ton and stood around US$70/ton by March, led partly by the Russia-Ukraine conflict and partly fresh waves of lockdowns in China. We believe that the present weakness will prove short-lived. Spreads are likely to remain in the c.US$85-90/ton range in the medium term on the back of: (i) global supply issues due to EU sanctions on Russian HRC, and (ii) China’s initiative to ramp up HRC capacities during 2022-23 (c.68mn MT or c.20% of existing total capacities in China). The latter factor may prove to be of greater relevance in the medium term as HRC production capacity in China might be expanding too fast, making an oversupply situation inevitable, in our view.

Valuations overlook merits against other construction plays 

ISL has corrected significantly in the past four months – underperforming the broad KSE-100 index by c.21%. It is presently trading at a FY23f P/E of 4.1x, below the average valuations for the Cement and Long steel stocks in our coverage. We think that the market is not appreciating the merits of ISL such as dollarized profits, expected recovery of spreads to around US$90/ton, and that its demand centers are resilient (rural demand for HDGC and 2-wheelers) and more varied than in the case of long steel and cement companies.