By: : Ismail Iqbal Securities (Pvt.) Limited
We are increasing our target price on Mughal Steel Limited (MUGHAL) to PKR 70.0 from PKR 55.1 previously. We have increased the target price because we now expect steel prices to bottom out early in FY16 and to rise slowly beyond it. Moreover, because of recent news flow implying that projects under CPEC are on track, we are increasing our assumptions of capacity utilization for the company. Our new target price implies a 17% upside to MUGHAL’s last clos‐ ing price, therefore we are adopting a positive stance on the company again. We recommend investors to BUY!
Please refer to our report titled “MUGHAL: Poised to gain from pick up in construction activi‐ ties” issued on June 1, 2015 for a more detailed report on the company.
Steel prices to bottom out in FY16: Our previous target price for MUGHAL was based on the assumption that the sharp dip in steel prices witnessed in FY15 will continue in FY16. However, we are now seeing a bottoming out of steel prices earlier than previously expected because they have already fallen to very low lows; hot rolled coil steel was down 5.6% by June 26, 2015 from a month earlier and down 26% from a year earlier, according to Bloomberg. Just like oil bottomed out after seven months of a sharp decline, we feel that steel prices should soon bottom out. We are now as‐ suming no growth in steel prices through 2Q‐4Q FY16 (previously we were expecting continua‐ tion of downward trend) and slow growth of 2% each year from FY17 to FY21.