We resume coverage on ASTL with a Buy stance based on a June 2021 TP of PKR41/sh. Our stance takes lead from the government’s construction package, earlier than expected monetary easing and improved margins arising from lower input costs. We expect an upward demand trajectory with a 3yr revenue CAGR of 15%.
ASTL is among the largest rebar producers in Pakistan with an estimated 8% market share. Its recent capacity expansion and strong brand perception will help it capture greater market share and utilization levels, as opposed to peers.
We expect ASTL to emerge from losses FY21f onwards. With a potential return of investor focus on the Construction space and a more optimistic outlook for demand, ASTL is likely to ultimately trade close to market multiples, in our view.
Construction package to pave the way for rebound in demand
We resume coverage on Amreli Steels Ltd (ASTL) with a Buy rating based on a June 2021 TP of PKR41.0/sh. The recently announced Construction Package by the government promises to stir construction activity (after a long pause) in a post Covid-19 scenario. In this backdrop, ASTL – with an estimated 8% market share in the steel rebar industry, presence in both South and North markets, and a good quality perception – will be able to stage strong sales growth, in our view. Recent capacity expansion of its melting / rerolling facilities to total 600,000 / 605,000tpa is backing our expected 3yr sales CAGR of 15%. Also, expanding its footprints in the North will further diversify its distribution network, which will help in attaining greater market share (North accounts for c. 80% of overall demand).
Easing cost pressures to complement sales growth
Amidst the Covid-19 outbreak, most cost pressures have substantially eased off and are likely to remain so during FY21f. Firstly, scrap prices have averaged close to US$244/ton during April 2020 compared to an average of US$273/ton during 9MFY20, led by depressed global demand amid US-China trade spat and Covid-19 pandemic. Secondly, the PKR/USD has appreciated recently to below 160, and we do not expect any major slip in the PKR until June 2021. Thirdly, the recent plunge in international oil prices can have a material impact on its fuel and power costs (comprising c.30% of total cost of sales), through reduced electricity tariffs in future. However, these will be checked by the impact of past fuel cost adjustments and withdrawal of Industrial Support Package imposed by its power supplier, K-Electric (KE). ASTL has challenged the same in courts but has provided for the expense. All in all, we expect its GP margins to rise to 11-13% during FY21-23f, compared to c.8% in 9MFY20.
Monetary easing will aid in reducing financial burden
Since mid-March 2020, the SBP has cut interest rates by c.425bps to 9%; and we expect it to cut further during CY20. Considering significant debt on ASTL’s books (c.PKR16bn; D/A of 65%) post expansion and working capital needs, the lower finance costs will provide much needed respite in FY21 to otherwise negative earnings. The SBP has also allowed deferred principal repayments for one year, which will soothe cash flows during FY21.