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Intermarket Intel - MUGHAL: 2QFY18 Result Review – Higher than expected; PRs2.30bn Capex announced

• Mughal Steels (MUGHAL) posted 2QFY18 NPAT of PRs315mn (EPS: PRs1.25),up 3% QoQ/45%YoY, vs. our estimated NPAT of PRs286mn (EPS:1.13). Divergence is attributed to better than expected gross margins and sales.
• Net sales during the quarter clocked in at PRs5.8bn, up 7%QoQ/16%YoY, due to product price increase and better production volumes than last year. GMs continued their rising trend, clocking in at 13.11% in 2QFY18, up 0.74ppt/4.60ppt on QoQ/YoY basis, as the company produced more billets in-house.
• Other highlights include: (i) Rise in distribution and marketing expenses by 97% QoQ potentially due to promotion of its new brand, and (ii) effective tax rate of 31% vs. 24% in 1QFY18.
• The company has also announced a mega Capex of c.PRs2.30bn, terming it as ‘Phase II’ of the expansion plan which involves:
• PRs500mn for addition of 396,000tpa to its melting capacity
• PRs470mn for installation of CCM and Shearing machine
• PRs900mn for installation of water treatment plant, roughing area and induction heater
• PRs400mn for civil works required for above projects
• Capex under ‘Phase II’ will be financed by way of long-term debt.
• Due to announcement of ‘Phase II’ of expansion plans, the ongoing BMR of bar mill will postpone the COD of new bar mill to 4QCY18 compared with previous date of 3QCY18. In addition, costs for the project have been revised up owing to currency depreciation. The costs have escalated by PRs336mn which will be financed by internal cash generation.
• Our right-adjusted TP of PRs91/sh implies a Buy stance. However, we await annual accounts and company guidance to revise our estimates.