Equity Analysis /

Pakistan: Long Steel – Stable earnings growth beyond FY22f

  • We reiterate our Buy ratings on ASTL and MUGHAL with new June 2023 TPs of PKR44/sh and PKR131/sh, respectively

  • MUGHAL is our top pick among the listed long steel producers due to its diversification within the non-ferrous segment

  • ASTL has under-performed broad KSE-100 by c.25% and we argue that risks have been more than priced in

IMS Research Team
Intermarket Securities
18 March 2022
  • We reiterate our Buy rating on ASTL and MUGHAL with new June 2023 TPs of PKR44/sh and PKR131/sh, respectively. Broadly, our estimate revisions are driven by expectation of slower demand, along with higher prices of global scrap and domestic rebar.   

  • MUGHAL is our top pick among the listed long steel producers, where its diversification in non-ferrous segment sets it apart. The company will enhance this attribute by expanding its Copper processing capacity and will also add a new capacity for Aluminum exports by FY24f.

  • ASTL has significantly underperformed the KSE-100 index; we argue that the risks are more than priced it in. Its greater presence across Pakistan and larger share should bode well once demand growth accelerates.

Maintain Buy rating on both MUGHAL and ASTL

We reiterate our Buy stance on both Amreli Steel Ltd (ASTL) and Mughal Iron & Steel Industries Ltd (MUGHAL) with new DCF based June 2023 TP of PKR44/sh and PKR 131/sh, respectively. We have updated our estimates in light of the recent surge in global scrap prices, higher rebar prices and slower demand. We expect construction activity to slowdown in FY22/23f amid weak macroeconomic backdrop (flat cement sales yoy FY22 so far) but the industry has demonstrated good pricing power to maintain profit margins. Support to volume growth of rebar will come from government backed housing projects, such as Mera Ghar Mera Pakistan scheme. Global scrap prices – which have recently  surged 70% yoy to over US$600/ton – may moderate in tandem with prices of coal and oil (down c.30%-50% from recent peaks) and may moderate further if the Russia-Ukraine conflict deescalates. This will provide cushion to margins of the local long steel producers, in our view. Both stocks are promising decent earnings CAGR (around 10%) beyond FY22, in our view.

MUGHAL: Diversification sets it apart

MUGHAL is our top pick between the two companies, as it is well positioned (in Punjab and closer to rural areas) and has a diversified product mix to sustain profitability beyond FY22f. In particular, its non-ferrous segment is contributing about 25% of FY22f revenues but almost half of total net profits, courtesy higher margins than steel segment, of about 3ppt sustainably (FY23 onwards). Note that Copper GMs were elevated at c.24% due to inventory gains and timely purchase of compressor scrap. However, we expect GMs to moderate from FY23f to 14-15%. In December 2021, MUGHAL announced a capex of c.PKR2.9bn – c.PKR1.8bn for expanding Copper capacity and PKR1.1bn for adding a new Aluminum processing capacity. MUGHAL will expand the copper processing capacity by c.10,000 tons pa, from 10,000 tons at present, with which it will capitalize on growing global demand for copper (expansion is set to be completed by 2HFY23). The new capacity for processing of c.30,000-36,000 tons pa. of Aluminum is expected to come online by 2HFY24; we have not yet incorporated it into our estimates.

ASTL: Risks are more than priced in

ASTL has corrected significantly in the past 3mths – under-performing MUGHAL and the broad KSE-100 index by c.8% and c.25%, respectively. We argue that the negatives have been more than priced in and highlight a forward 3yr earnings CAGR of c.9%. We expect that presently high prices of rebars (over PKR200,000  per ton) will slowdown volume sales, where we expect utilization levels during FY22-24f to average 60%-65% (GMs to average c.12%). Compared with MUGHAL, ASTL has greater countrywide presence and a larger market share – making it well-positioned to benefit when demand growth accelerates, in our view.