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Amreli Steels Limited - Ready To ‘Steel’ the Show; BUY (Detailed Report)

We initiate coverage on Amreli Steels (ASTL) with a BUY call with our Dec-17 TP of PKR81/sh offering an upside of 21% along with a dividend yield of 4%. We tout  ASTL as a play on the infrastructure development theme of Pakistan under the ambit of CPEC with our liking for the stock stemming from (i) expansion of 300k ton rolling capacity (expected to come online in the second quarter of FY18) amidst surge in CPEC activity, (ii) efficiency gains (~PKR3,200/ton) and tax benefit from the new facility (iii) significant growth in demand for re-bars as construction activity garners traction, (iv) additional Regulatory Duty of 15% (i.e. 30%) on re-bars to curb imports, (v) strong balance sheet & (vi)  premium brand equity rooted in high quality. ASTL is trading at an FY17/18 PE of 22.1x/11.6x, however it offers a 3 year earnings CAGR of 35% with a PEG of 0.65x relative to 0.95 for the broader Elixir universe.

The Launch Pad Is Ready: ASTL’s expansion of its melting and rolling mills is expected to be commissioned by Sep 2017. The said expansion would increase ASTL’s melting capacity by 75% to 350k tons and rolling capacity by 167% to 480k tons at its Dhabeji site. The expansion would allow ASTL to enjoy cost savings of ~PKR3,200/ton through fuel and transportation which will allow the company to maintain average margins of ~20% over FY18-21 period, relative to current normalized margins of 17%.

A Game of Volumes: Pakistan is currently in the midst of a construction boom which is expected to increase demand for construction material including steel amidst CPEC and related economic activities. We believe ASTL’s expansion announcement comes at the right time which will enable the company to capitalize on demand boom where we eye ASTL’s profitability/sales to increase at a 5yr CAGR (FY17-21) of 21%/14%.