Intermarket Securities Limited.
  • Amreli Steels Limited (AMSL) is the largest selling steel re‐bars maker of Pakistan with 180k tpa capacity. It is going public to raise finances for its planned capacity expansion to 480k tpa, which will significantly raise its market share from 8% at present. The company’s products are strongly correlated with local cement sales (1:6 ratio) where medium‐term driver includes planned high PSDP spend (FY16F: PkR1.6tn) and CPEC projects. At the same time, given a consistent demand profile (housing shortage: 9mn units) and better pricing power, the company intends to raise its share of retail sales from 50% at present to 65% over the longer run.
  • Steel re‐bar prices are insulated from global prices due to high import duties & sales tax, export duty on Chinese re‐bars, and risk of rust if imported through sea (only 28k tons imported in FY15). While AMSL enjoys low duty on its scrap imports, which have become cheaper amid global commodities slump, the new plant will result in cost savings, cementing the company as the lowest cost producer due to new technology and integration of steel melting facility with new rerolling capacity.
  • At the floor price of PkR24/share, the stock offers attractive valuation of FY16F/FY17F/FY18F PE of 5.6x/4.9x/2.3x (IMS Research estimates). Our indicative Jun’16 target price is PkR78/share where we have been more conservative on GM projections and have not incorporated any benefit(s) arising from potential debt retirement/tax savings. 

IPO

AMSL conducted an analyst briefing yesterday, in connection with its upcoming IPO where the company plans to issue 74.25mn shares (25% of the post‐IPO shares) at a floor price of PkR24/share. The purpose of the issue is to expand its steel re‐rolling capacity from 180k tpa to 480k tpa, and expand billet manufacturing capacity from 200k tpa to 350k tpa. In 9MFY15, AMSL posted NPAT of PkR580mn (EPS on post‐IPO shares: PkR1.95), with (i) sales (annualized) up 18%YoY and (ii) GMs rising by 4.5pptYoY to 16.0% on lower raw material cost owing to global commodities price slump.

Steel Re‐bars Business

AMSL is the largest domestic manufacturer of steel reinforcement bars (re‐bars) which are used as rods to support concrete structures. Steel re‐bar is a fragmented industry in Pakistan with AMSL commanding the largest market share of 8%, which management expects will rise to 16% postcapacity expansion. Amreli steel is a quality brand in Pakistan due to its compliance with American and European standards, with its products being used in many landmark structures in Pakistan. As such, its re‐bars are priced at a premium to that of its competitor.

Outlook

With improving PSDP spending coupled with CPEC projects, steel demand is expected to pick up significantly across the medium‐term where we understand that AMSL is already the largest supplier to Chinese contractors. In this regard, as per AMSL management, there are limited threats from imports due to (i) high duties (10% CD, 15% RD), (ii) 17% GST, (iii) 25% export duty on re‐bars in China to promote their domestic infrastructure and (iv)sensitive nature of the product being prone to rust if transported through sea. At the same time, AMSL management believes there are significant barriers to entry for new players while existing peers may take some time to close the gap with AMSL. Over the longer run, AMSL intends to better capitalize on retail demand which depicts relatively smooth demand and does not need bulk discounts. Currently, 50% of AMSL’s sales are towards the retail segment and the aim is to raise this to 65% going forward. Considering housing backlog of 9mn units (growing by 1.1mn pa.) and per capita steel consumption of 19kg (vs. global/developing countries avg. of 36kg/70kg), demand potential is certainly there although we flag limited mortgage financing availability as a hindrance. Note that for every 10kg/capita increase in consumption, the demand is expected to increase by 2mn tpa.

Intermarket Perspective

At the floor price of PkR24/share, the stock offers attractive FY16F/FY17F/FY18F PE of 5.6x/4.9x/2.3x (IMS Research estimates). Our indicative Jun’16 target price is PkR78/share where we have been more conservative on GM projections and have not incorporated any benefit(s) arising from potential debt retirement/tax savings.