We initiate International Steels Limited (ISL) coverage with a BUY rating. Our Jun 25 target price for the stock stands at PkR 134/sh, offering a potential upside of 52% along with the dividend yield of 9%, taking the total return to 61%.
Our investment case is based on the following premise:
Relatively resilient demand for 2/3 wheelers: The 2/3-wheeler industry accounts for around 50% of ISL’s sales. The segment has shown relative resilience in Pakistan’s volatile macroeconomic environment, with the industry’s sales falling by 35% over two years. The passenger car segment fell by 66% within the same timeframe. With easing inflationary pressures and recovering economic activity, the demand for 2/3 wheelers may inch toward historical averages.
Appliance demand trending higher: The appliance industry accounts for around 20% of ISL’s sales. Our market assessment suggests that demand for appliances has recovered considerably during 2HFY24, supported by a backlog of orders and lax LC restrictions. Given Pakistan’s high inflation environment, we think consumer preferences will incline towards cheaper locally assembled appliances rather than their imported counterparts. The local appliance industry may continue its recovery trend well into FY25.
Rise in crop yields bode well for flat steel demand: Pakistan’s agriculture industry is responsible for around 10% of ISL’s sales. The sector saw robust growth of 6.3% in FY24. Particularly, important crops witnessed an increase of 16.8%. FY25, we may see the trend continue, driven by supportive policies. Notably, agriculture remains a strong part of the SIFC, which induces foreign investment in the industry. As crop yields rise further, we may see the demand for storage silos rise and, in turn, cause demand for CRC from the agriculture industry.
Monetary easing cycle to further bolster profitability: Easing inflationary pressures have enabled the SBP to commence the monetary easing cycle. Notably, borrowing costs have come off by nearly 5pps from their peak level, reducing ISL’s debt servicing burden. Moreover, monetary easing is likely a precursor to the recovery in Pakistan’s economic cycle, benefitting most of ISL’s industries. Furthermore, ISL will also benefit from reduced servicing on its debt.
Courtesy – BMA Capital Management Ltd.
