ASTL 211216 (1)

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Source: Akseer Research

Relative Performance (1-Year)

Source: Akseer Research

EPS & DPS Outlook

–– H

We initiate coverage on Amreli Steel Limited (ASTL) with a BUY recommendation based on

Jun-17 PT of PKR 100/share offering an upside potential of 48.7% along with a dividend yield of 3.0%. ASTL is an ideal proxy to Pakistan’s ongoing construction boom.

We expect ASTL to post FY18-20 EPS CAGR of 48%, driven by better production efficiency at

Dhabeji expansion, five year tax holiday on the equity funded expansion, and volumetric growth due to an expanded capacity amid weaker economics for imported rebar post increase in import duties.

We expect Amreli’s topline to grow at a CAGR of 25% during FY18-20 led by growth in sales volumes of rebars. We expect volume CAGR of 17% during FY18-20.

Our forecast for FY17 EPS stands at PKR 4.17, down 13% YoY as we expect weak 1H earnings to rebound in 2H as imported rebar inventories (industry wide and with ASTL) would likely clear up by Dec-16 and improve pricing economics. 1QFY17 EPS for ASTL fell 39% YoY.

Key risks to our thesis include reduction in import duties, increase in international scrap

prices and lower than expected growth in domestic rebar demand.

Valuation and Recommendation We initiate coverage on Amreli Steel Limited (ASTL) with a ‘BUY’ recommendation, based on a Jun-17 Price Target (PT) of PKR 100.00/share, yielding an upside of 48.7% along with a dividend yield of 3.0%. Our PT has been computed using FCFF based Discounted Cash Flow (DCF) valuation methodology, using terminal growth of 4%. We have used a risk-free rate of 7.5%, beta of 1.00 and equity risk premium of 6.0%, and cost of debt of 8% to arrive at WACC of 12.2%. ASTL’s EPS is anticipated to increase at a CAGR of 48% during FY18-FY20 on the back of higher volumes and better margins post expansion in FY18 and further augmented through a 5 year tax holiday on expansion profits due to the expansion being largely equity funded. Ideal proxy to the ongoing construction boom ASTL is well positioned to benefit from expected increase in steel demand from on-going construction boom in Pakistan, evident from higher local cement dispatches. Increased construction activities are broad based with rising income levels driving increased housing demand, and increased infrastructure spending under CPEC. Dhabeji expansion to drive EPS at a CAGR of 48% during FY18-20 ASTL is setting up a 300k rebar expansion at Dhabeji along with a 150k billet production unit. The capacity is expected to come online by Sep-17, which would augment volumes in FY18. Expansion is estimated to cost PKR 3.4bn and would be completely funded through equity.

Key Data

PSX Ticker ASTL

Target Price (PKR) 100

Current Price (PKR) 67

Upside/ Downside (%) 48.7%

Dividend Yield (%) 3.0%

Total Return 51.6%

12 month High (PKR) 76

12 month Low (PKR) 44

Outstanding Shares (mn) 297.01

Market Cap (PKR mn) 20,075

Year End June

Key Financial Ratios FY14A FY15A FY16A FY17E FY18F FY19F EPS 2.69 4.54 4.81 4.17 6.84 11.38 EPS Growth 461% 69% 6% -13% 64% 66% DPS - - 2.00 2.00 2.75 5.00 PER 25.12 14.89 14.06 16.22 9.89 5.94 Dividend Yield - - 3% 3% 4.1% 7.4% EV/EBITDA 10.44 6.92 7.95 10.36 7.18 5.00 P/B 3.11 2.56 1.49 1.44 1.33 1.13 ROE 12% 17% 12% 12% 17% 24%

Source: Company Accounts, Akseer Research

Amreli Steel Limited Company Update Pakistan Research PSX: ASTL Bloomberg: ASTL: PA Reuters: AMST.KA REN # REP-400R

Ideal proxy to the construction boom

21 December 2016

Suneel Kumar [email protected]

http://www.jamapunji.pk/

mailto:[email protected]

2 / 3 pages

Akseer Research (Pvt) Limited

Amreli Steel Limited 21 December 2016 Company Update


D/Y Comparison (LTM)


PE Multiple Comparison (LTM) We conservatively estimate capacity utilization of the new plant at 34% in FY18 and to subsequently rise to 97% in FY20. Production from the new plant is expected to be prioritised due to higher efficiency and expected savings in energy and transportation costs. As a result, overall capacity utilization is expected to decrease to 50% in FY18 and subsequently increase to 61% by FY20. We expect already applicable custom, regulatory and additional regulatory duties on rebars to keep a check on imported rebars and help gross margins to improve to 18% in FY18 and subsequently rise to 20% once the production is fully shifted to the new Dhabeji plant due to added savings on fuel and transportation costs. We expect ASTL’s EPS to grow by 64% in FY18 to PKR 6.84 and subsequently rise to PKR13.52 in FY20 (FY18-20 EPS CAGR of 48%) driven by volume growth and improved utilization of new plant. We expect ASTL to resume its Site rebar plant in FY21 as the Dhabeji unit approaches full utilization. Cost mitigation and tax savings to augment earnings The hot link between melt shop and re-rolling mill after expansion at Dhabeji is expected to generate cumulative savings of PKR 2,000/ton of rebar on account of elimination of gas reheating and transportation cost and therefore increase margins to 20% in FY19 and onwards. The expansion being 100% equity financed is expected to generate tax savings of PKR6.3bn over the next five years till FY22. Trading business to constrain EPS growth in FY17 ASTL posted an EPS of PKR 0.76 in 1QFY17 down by 39% YoY. The decrease in EPS was primarily due to a substitution of low margin trading rebars in sales mix. Trading bars comprised 16% of 1QFY17 volumes. Additionally, rising international scrap prices further suppressed margins on manufactured rebars, taking gross margin to 14% down by 5pp YoY. Trading rebars inventory is likely to be completely sold off by 2QFY17 due to higher demand for rebars on the back of tight scrap supplies from Gadani ship breaking yard due to fire incident and lack of fresh supplies of Chinese rebar post imposition of additional regulatory duties. Higher volumes would likely push 2QFY17 EPS to PKR1.37. However, margins will likely recover in 2HFY17 and improve full year FY17 gross margins to 16% due to expected increase in the prices of rebars in local market on the back of increase in international prices and clearing up of the existing stock of imported rebars. We expect ASTL to post an EPS of PKR 4.17 in FY17 down by 13% YoY.

1QFY17 Earnings Performance Year Ending June 1QFY16 1QFY17 YoY

Net Sales 3,431 3,218 -6%

Cost of Sales (2,778) (2,754) -1%

Gross Profit 654 465 -29%

Distribution Cost (66) (82) 24%

Admin Expenses (49) (70) 42%

Other Charges (29) (18) -36%

Other Income 1 5 471%

Profit From Operations 510 299 -41%

Finance Cost (108) (74) -32% Profit Before Tax 402 225 -44% Taxation (70) (0) -100%

Profit After Tax 332 225 -32%

EPS 1.25 0.76 -39%

Amreli Steel Limited

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21 December 2016 Company Update

Akseer Research (Pvt) Limited

Disclaimer This report has been prepared by Akseer Research and is provided for information purposes only. Under no circumstances this is to be used or considered as an offer to sell or solicitation of any offer to buy. While reasonable care has been taken to ensure that the information contained therein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be relied upon as such. From time to time, Akseer Research and/or any of its officers or directors may, as permitted by applicable laws, have a position, or otherwise be interested in any transaction, in any securities directly or indirectly subject of this report. This report is provided only for the information of professional advisers who are expected to make their own investment decisions without undue reliance on this report. Investments in capital markets are subject to market risk and Akseer Research accepts no responsibility whatsoever for any direct or indirect consequential loss arising from any use of this report or its contents. In particular, the report takes no account of the investment objectives, financial situation and particular needs of investors, who should seek further professional advice or rely upon their own judgment and acumen before making any investment. The views expressed in this report are those of Akseer’s Research Department and do not necessarily reflect those of the company or its directors. Akseer Research as a firm may have business relationships, including investment- banking relationships, with the companies referred to in this report. Akseer Research or any of its officers, directors, principals, employees, associates, close relatives may act as a market maker in the securities of the subject company, may have a financial interest in the securities of the subject company to an amount exceeding 1% of the value of the securities of the subject company, may serve or may have served in the past as a director or officer of the subject company, may have received compensation from the subject company for corporate advisory services, brokerage services or underwriting services or may expect to receive or intend to seek compensation from the subject company for the aforesaid services, may have managed or co-managed a public offering, take-over, buyback, delisting offer of securities or various other functions for the subject company.

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Valuation Methodology To arrive at our 12-months Price Target, Akseer Research uses different valuation methods which include: 1). DCF methodology, 2). Relative valuation methodology, and 3). Asset-based valuation methodology. In this report, our PT is founded on reserve based DCF methodology.

Ratings Criteria Akseer Research employs a three tier ratings system to rate a stock, as mentioned below, which is based upon the level of expected return for a specific stock. The rating is based on the following with time horizon of 12-months.

Rating Expected Total Return

Buy Greater than 15% Hold Neither Buy nor Sell Sell Less than and equal to -5% Ratings are updated to account for any development impacting the economy/sector/company, changes in analysts’ assumptions or a combination of these factors.

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Analyst Certification

The research analyst, denoted by ‘AC’ on the cover of this report, primarily involved in the preparation of this report, certifies that (1) the views expressed in this report accurately reflect his/her personal views about the subject company/stock /sector and (2) no part of his/her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

Pakistan Research Team

Usama Qamar Nizami [email protected]

Pardeep Kumar [email protected]

Sajjad Hussain [email protected]

Suneel Kumar [email protected]

Contact Details Akseer Research (Pvt) Limited A-3, 3rd Floor, Plot No. 2C, 5th Zamzama Commercial Lane DHA Phase 5 Karachi. E: [email protected]






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