The Bell about Steel – Elixir Securities Limited

Karachi, September 10, 2012 (PPI-OT): International Steels Ltd: Profits likely in FY13 but priced in

Encouraging FY12 results
International Steels Limited (ISL) posted loss after tax of PKR 104 million for FY12, translating into a loss of PKR 0.24/share.

According to Elixir Securities Limited, although the company reported a headline loss for full year FY12, last quarter (4QFY12) resulted in profits of PKR 176 million (EPS: PKR 0.40). This was the only profitable quarterly period in the last year.

Improving utilization and margins
ISL is estimated to have operated at a utilization of ~70% during 2HFY12 as opposed to less than 60% during the 1H. Improvement in utilization was the key reason behind 156% increase in gross profits during 2HFY12 vis-à-vis 1H. Furthermore, gross margins also doubled from 5.6% in 1HFY12 to 11.9% in 2HFY12. Margin improvement came on the back of availability of cheaper raw material and streamlined production as ISL is estimated to have controlled initial teething problems.

Shift away from USD borrowing would trim exchange loss / escalate interest costs
Due to steep PKR devaluation, ISL converted its USD based short term borrowing into local currency in Mar-12. While local currency borrowing is more expensive in terms of interest rate as it is linked to KIBOR (as opposed to LIBOR), the shift protects the company from exchange losses in times of PKR devaluation. ISL incurred exchange losses of PKR 250 million during last year.

Profitability to sustain in FY13
Assuming 80% utilization for cold rolled mill, and 85% for galvanizing plant in FY13, Elixir Securities Limited expects ISL to post an EPS of PKR 1.29 in FY13. EPS shall be highly sensitive to capacity utilization where every 5 percentage point increase would add PKR 0.25 to the EPS.

Expensive on FY13 earnings but there is future earnings growth
ISL trades at FY13 PER of 11.5x, which seems expensive, and would limit sustained gains. However, the current price adequately reflects likely doubling of profits next year on account of 1)35k addition in Cold Rolled Coil (CRC) capacity due to increase in annealing capacity, along with production optimization and gradual ramp up to 100% utilization by Jun-13. Elixir Securities Limited’s Jun-13 price target of PKR 17 offers an upside of 15%. Elixir Securities Limited Advises Hold.