Amreli Steels Ltd looks attractive to buy

A local research house upgrades its stance on ASTL from Neutral to Buy, with a new June 2022 TP of PKR60/sh (from PKR49/sh earlier), led by increased spending on construction activities by both the government and private sector, which will also lend greater pricing power and lift margins.

Given the present momentum in demand, analyst expects ASTL to achieve optimum capacity utilization of c.85% by FY23 vs. c.45% in FY20 and achieve gross margins of 12-15% over the next three years, from 7.5% in FY20 given adequate pricing power.

Even though the stock is up 35% FYTD, other steel stocks in our coverage have risen 108% in the same period. We highlight that ASTL offers a more sustainable growth trajectory, while Mughal Steel is riding the surge in international copper prices (susceptible to reverse).

Upgrade to Buy with a new TP of PKR60/sh

We upgrade our stance on Amreli Steels Ltd (ASTL) from Neutral to Buy, with a new June 2022 TP of PKR60/sh, up from PKR49/sh previously. We estimate EPS of PKR3.97/4.13 for FY21/22f. Our outlook on steel rebar demand has improved based on the surge in construction activities following government incentives – first amnesty for builders (extended until 2QFY22) and now commencement of low-income housing project. Recent price increases has allowed ASTL to pass on the cost escalation caused by surge in international scrap prices (up 58% since the start of FY21). In the past 3mths, ASTL has under-performed other Steel stocks, where we highlight a more steady and sustainable earnings growth trajectory, in contrast to Mughal Steel, which is riding the surge in international copper prices (susceptible to reverse), in our view.

Naya Pakistan lifts outlook for demand

ASTL’s 600,000tpa rerolling plant puts it in a prime position to capitalize on the rising demand and increase its market share, especially in the Northern markets where ASTL is trying to increase its foothold through extensive marketing. Local cement sales grew 15.5% yoy (a proxy for demand). In this backdrop, pricing power has improved. The government’s Naya Pakistan housing scheme aims to build 4mn houses in the next four years with the Lahore Development Authority initiating the first project of building 4,000 apartments in Lahore. On the other hand, there has also been an upsurge in the construction activities of the private sector, in gated suburbs like Bahria Town Karachi and DHA City. ASTL management guided for target sales of 380,000 tons in FY21, compared to 272,000 tons sold in FY20 where demand was affected due to Covid-19.

Significant improvement in gross margins

During FY19-20, ASTL posted low gross margins of c.8.5/7.5% as it operated below 50% capacity utilization (due to insufficient demand following expansion). With the expected rebound in demand, we expect gross margins to rise to 13% by FY23 compared with. 7.5% in FY20, partly due to optimum utilization levels. Note ASTL’s gross margins peaked at 18% in FY17 with 87% utilization level. Since January 2021, ASTL has been able to increase prices of steel rebar to a record high of PKR140,000/ton and in turn pass on the cost of high scrap prices to end-consumers. The expected rise in margins is also supported by our outlook for PKR/US$, which is expected to depreciate moderately amid overall macro-economic improvement. Lastly, interest rates are expected to remain under 10% in the near term, which will keep borrowing costs low as well, in our view.

Courtesy – Intermarket Securities Limited

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