Pakistan Steel: AGHA steel IPO - All that glitters is not gold,(AKD Daily, Oct 02, 2020)
AKD Daily
Pakistan Steel: AGHA steel IPO - All that glitters is not gold
- Agha Steel Industries Limited (AGHA) is in process of listing on the Pakistan Stock Exchange through Initial Public Offering (IPO), with the book building scheduled to commence on 6th Oct’20. The company intends to raise fresh capital of PkR3.6bn or US$21.8mn (at a floor price of PkR30 per share and new issue of 120mn shares) via IPO for a 20.83% stake in the company. The principal purpose of the issue is to partially fund phase II expansion.
- In terms of financial performance, AGHA has been an outperformer so far, with the company delivering solid profits over the last two or so years compared to its competitors, who either posted losses or barely made any profits. This came primarily on account of company’s distinguished margin profile (last 3yr average GM: ~23% vs. peers’ average of ~10-12%), which according to the management came through i) better plant efficiency, ii) different raw material mix (i.e. cheaper scrap) and iii) strong presence in high margin institutional segment.
- However, our discussion with various industry players suggest otherwise, with a consensus view that the electrode and cost of keeping its inventory partially offset the lower energy consumption gains while use of low grade scrap compromises the quality of the final product.
- While a company with superior margin profile should command premium valuations, we remain skeptical in AGHA’s case both in terms of sustainability and the means to achieve it (i.e. use of low grade scrap). In this backdrop, we believe that a strike price significantly above the floor price can skew the risk-reward ratio towards the former. Subscribe at floor.
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