Karachi, October 13, 2021 (PPI-OT): ISL and ASL: Flat Steel extravaganza
Our liking for the flat steel manufacturers emanate from i) broad based growth in consumer electronics and 2-3 wheeler segment, ii) CRC capacity expansion (ISL) and strategic alliance with MISI (ASL), iii) removal of SRO-641 (allowing ISL and ASL to sell CRC and HDGC to pipe manufacturers), and iv) imposition of Anti-Dumping Duty on CRC and cut in export rebates of 13% by China on CRC-HDGC. We expect ASL and ISL to continue the same trajectory of topline growth with FY21-23F CAGR of 10%, similar to a growth experienced in FY21 where aggressive growth in volumetric offtakes (+31%YoY) combined with cost pass-on ability resulting in topline growth of 60%YoY in FY21 and gross margin of 19.8% (vs 8.4% in FY20).
In the long run, companies are also eyeing growth in export sales where ISL/ASL export sales stood at PkR11.9bn (18% of sales)/PkR2.55bn (4.6% of sales) and a growth of (+11/990%YoY) in FY21. Moreover, we expect ASL to leverage its newly formed strategic partnership with MISI to increase its export base while ISL is expected to grow export sales by (+10-15%YoY) to 30 countries across the globe.
Key developments are abound for both (ASL and ISL): ASL announced that it has entered into a strategic alliance with a Japanese manufacturer Marubeni-Itochu-Steel Inc. (MISI) for procurement of raw material to hedge against rising HRC prices. Additionally, MISI purchased 38.3mn shares at a price of PkR30/sh of ASL. On the other hand, ISL’s debottlenecking of CRC finishing capacity (total capex: PkR1.23bn) to 350K tons from 230K tons is expected to come online in 3QFY22 while work on HRC plant with a capacity of 1.2mn tons per annum is expected to be completed by the end of CY24. The plant will provide low and medium carbon steel HRC.
Imposition of Anti-Dumping Duty on CRC and removal of SRO-641 bodes well for the local flat steel manufacturers where managements believe pipe steel manufacturers will likely to contribute around 200k tons to the market in FY22 where (ISL and ASL) are likely to capture 90-100% market share. Furthermore, cuts in export rebates by China on CRC and HDGC augurs well for local players and will keep domestic CRC-HRC spread high. CRC-HRC spread stands at US$109/ton in FYTD vs US$100/ton in CYTD. Flat steel sector (ISL and ASL) performance has remained lackluster (FYTD return: -ve 16%) despite robust earnings and significant positive developments supporting future earnings. ISL/ASL are trading at FY21 P/E of 4.5x/2.6x vs. KSE-100 trading at 5.8x, implying an upside of 29/123% at last close.
ABOT: Compelling valuations driving investment case
Abbott Laboratories Limited is one of the largest pharmaceutical company in the country with a market share of 5.9% as reported by IQVIA (formerly IMS). The company operates in two major segments, Pharmaceutical (contributing 70% to its top line) and Nutrition (contributing ~20% to top line) whereas the remaining sales come from its trading and other businesses. The company operates through a portfolio of 150 brands where at least 10 brands contribute sales of over PkR1.0bn per annum. Lastly, the company holds leadership status in 9 categories including child and adult nutrition.
Given significant focus on introduction of new products in portfolio, ABOT has been able to maintain robust gross margins of ~40%, amongst the highest in the industry, despite significant PkR depreciation and heightened inflationary pressures. The company did enjoy price revisions on some pharmaceutical products which supported margins further. However, we do anticipate PkR depreciation to dent margins in the coming quarters as roughly 76% of raw materials prices are US$ denominated, if the prices are not revised again.
Company also reported healthy cash reserves of ~PkR8.0bn in last reported financial accounts which have been parked in fixed income products. On top of the cash reserves, the company also has a very solid cash flow generation of ~PkR2.0bn per quarter which will allow the company to not only maintain a healthy payout, but also capture growth opportunities.
Jump in profitability (growth of 54%YoY during 1HCY21), has so far remained unappreciated where the scrip has only returned 3%CYTD. Consequently, the scrip trades at a multiple of only 11.2x which is amongst the lowest in the sector (only OTSU and SAPL trade at cheaper multiples but have liquidity issues). Also, the average 5yr historic P/E multiple for the scrip is 20.6x which means the scrip is currently trading at a discount of 44% over its historic multiples.