JS Securities Limited – Morning Briefing

Karachi, May 17, 2019 (PPI-OT): ASTL: Things could go from bad to worse

We revisit our investment case on Amreli Steels Limited (ASTL). We revise our Dec-2019 target price for the stock from Rs55 to Rs16, recommending a Sell stance on the stock.

The drastic reduction in our target price for the stock stems from a bleak outlook in the short to midterm horizon, due to (1) inability to pass on any cost pressures, (2) weak demand due to economic slowdown and (3) incoming additional capacities in the not too distant future.

Going forward, there might be further pressure in the macroeconomic environment, particularly with the upcoming IMF program, where further rupee devaluation, interest rate hikes and utility costs’ increases cannot be ruled out.

ASTL investment case revisited; Recommend ‘Sell’
In this report, we revisit our investment case on Amreli Steels Limited (ASTL), where we revise our Dec-2019 target price for the stock to Rs16 (previously Rs55). The drastic revision in our outlook for the stock stems from a bleak outlook in the short to midterm horizon, due to (1) inability to pass on any cost pressures, (2) weak demand due to economic slowdown and (3) additional capacities to come online by Jun-20. To recall, the company announced profit after tax (PAT) of Rs998mn (EPS: Rs3.36) during 9MFY19, which was a decline of 78% YoY.

At the same time, the company had posted a net loss of Rs293mn (LPS: Rs0.99) in 3QFY19 alone. The loss in the quarter was mainly on account of a severe plunge in gross margins, which reduced from 21.2% in 3QFY18 to 4.92% in the recent quarter, as the company could not pass on the impact of lower rebar prices and rising US$ against the local currency. Another point to note is that pre tax profitability witnessed a decline of 81% in 9MFY19 where normalized taxation would have pulled earnings further down to Rs0.41/share for nine months period.

Further cost burden likely in wake of IMF induced measures
Going forward, there might be further pressure in the macroeconomic environment, particularly with the upcoming IMF program, where further rupee devaluation, interest rate hikes and utility costs’ increases cannot be ruled out. These measures would exert additional burden on the steel sector’s profitability, with ASTL being no exception. With additional capacities expected to come online (Naveena, Mughal Steel and Frontier Steel), the company would not have the luxury of raising prices to pass on the additional costs to consumers. Given the situation, we recommend Sell on ASTL.

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