Karachi, January 26, 2023 (PPI-OT): LUCK and ISL: 2QFY23E Result Previews

LUCK – unconsolidated earning to clock in at PkR11.43/sh in 2QFY23: LUCK is scheduled to hold its board meeting for the 1HFY23 tomorrow, where we expect the company to record unconsolidated earning of PkR11.43/sh vs EPS of PkR11.91/sh during 1QFY23, changing by -4%/+48% on QoQ/YoY basis. We expect topline for the period to clock in at PkR25.3bn, increasing by 28%/23% QoQ/YoY majorly due to increasing retail prices (up by ~39%YoY) and better offtakes against last quarter, which were up by 22% vs. 1QFY23 as torrential floods and demand destruction bore their effects during the period.

Furthermore, we expect gross margins to clock in at 25% (vs. ~31%/23% last quarter/SPLY), as the company continues to show prowess in efficient coal inventory management alongside the ability to successfully utilize local coal (~20% of coal mix in the North). Overall, we expect company to post consolidated PAT of PkR5.5bn (EPS: PkR17.2) for 2QFY23. The scrip currently trades at FY23 P/E of 5.1x with our TP of PkR655/sh providing an upside of 60% from the last close.

ISL – Earnings to clock in at PkR1.07/sh in 2QFY23: ISL is expected to announce its 2QFY23 result tomorrow, where we expect the company to post a profit of PkR463mn (EPS: PkR1.07) vs NPAT of PkR1.56bn (EPS: PkR3.58) during 2QFY22, changing by +3.8%/-70% on QoQ/YoY basis. The steep decline in earnings majorly emanates from falling flat steel margins, which averaged at US$70/ton during the outgoing quarter vs. US$110/ton SPLY. Falling volumetric output on the back of depressed production in the autos/white goods sectors alongside an overall fallen LSM activity (down 5.5% in Nov’22) has adversely impacted the business activity in the steel sector further.

We have assumed slight recovery in CRC/Galvanized offtakes, approximately ~5-6%, from an extremely low base of 1QFY23 assuming some recovery in local manufacturing from post-flood lows. Furthermore, rising conversion costs (electricity/direct costs) and multi-decade high interest rates have further exacerbated the situation, for this reason we expect GP/NP margins to clock in at 12.25%/2.5% during the quarter vs. 15.3%/8.3% SPLY. With raw material (HRC/scrap etc.) hard to come by amidst import restrictions by the SBP in the near term, we have a ‘NEUTRAL’ stance on the stock due to the cyclical nature of the business and the prevalent economic situation in the country. The company currently trades at FY23 P/E of ~8x while our TP of PkR45/sh provides a total upside of ~15% from the last close.