By: 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 re‐ rolling 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.