Equity Analysis /

International Steels Ltd: FY19 results: Higher tax charge leads to earnings miss

    Intermarket Securities
    19 August 2019

    International Steels Ltd (ISL) posted 4QFY19 NPAT of PKR305mn (EPS: PKR0.70), down 73%yoy/50%qoq. This came in much below our expected NPAT of PKR451mn (EPS: PKR1.04), due to a high tax charge (PBT declined by 33%yoy and was up 7%qoq). Consequently, FY19 profits came down by 39%yoy to PKR2,664mn (EPS: PKR6.12). ISL also announced a final dividend of PKR1.50/sh, taking the FY19 payout to PKR3.00/sh (vs PKR4.50/sh in FY18).

    Major takeaways from ISL’s 4QFY19 result include:

    • Gross margins rose sequentially by 2.7ppts to 12.6%, higher than our estimate, possibly due to swift pass-on of PKR depreciation.
    • Other charges grew by 2.4x yoy to PKR280mn, where we suspect FX loss was the key reason.
    • Finance cost was recorded at PKR280mn, up 54%yoy but down 33%qoq. The sequential reduction in finance cost (despite interest rates moving up) reflects improved working capital management and cashflows, in our view.
    • Lastly, effective tax rate during the quarter was 65%, likely due to a change in tax credit on new investments for FY19 (from 10% to 5%). ISL had earlier reported lower taxation during 9MFY19 on the basis of 10% credit and has likely reversed it in this result.

    During FY19, the sharp decline in profits came from declining margins (PKR depreciation), uptick in distribution expenses (fuel prices pushed up freight charges) and higher finance cost (increased leverage and monetary tightening). During the year, ISL also expanded its annual capacity from 450k tons to 1,000k tons.

    We have a Buy stance on ISL with a Jun’20 TP of PKR50/sh (upside 52%). Reduction in borrowing and pricing discipline in the industry should counter concerns of a sales slowdown while opportunities for import substitution make ISL an attractive case for the medium-term.

    Risks:  (i) PKR depreciation against USD, (ii) Rise in international HRC prices, and (iii) low pricing power due to surplus capacity in the sector.