Karachi, November 30, 2022 (PPI-OT): AGHA: FY23 bottom-line may remain under pressure
Agha Steel Industries Limited (AGHA) held its Corporate Briefing session yesterday to discuss recent financial results and outlook. The company posted a profit of Rs153mn (EPS: Rs0.25) in 1QFY23, a 73% drop vs SPLY. Primary reasons for the decrease in company’s profitability were lower volumetric sales due to floods and heavy rainfall.
Going forward, we expect construction activity to remain dull in FY23 due to fiscal consolidation, resulting in a slowdown in company sales. However, as macro clarity emerges, an improving demand outlook could bode well for the sector.
Lower sales and higher finance costs impacted Q’s earnings
AGHA held its Corporate Briefing session yesterday to discuss the recent financial results and outlook of the sector. The company posted a profit of Rs153mn (EPS: Rs0.25) for 1QFY23 compared to a profit of Rs558mn (EPS: Rs0.92) during SPLY. Sales reported a 23% YoY decline due to lower volumes. Moreover, despite some cost efficiencies, gross margins also tapered by 1ppt YoY. In addition, bottom-line also received pressure from 55% YoY higher finance costs this outgoing quarter. As a result, PAT declined by 73% YoY.
New rolling mill to enhance capacity
AGHA is under the process of installing a Micro Mill Danieli (Mi.Da) Rolling mill which would enhance the rebar capacity from 250,000 tons/annum to 650,000 tons/annum. Company incurred 35% of the cost of expansion at a dollar average of 140 whereas 65% payment was made at PKR/US$ of 170. The project is near completion and the management in its briefing yesterday shared that it expects the plant to commence operations by Jun-2023.
Post Mi.Da commencement, the company would be able to compete internationally as well, where it targets to tap the export market at some point in the future. Mi.Da plant manufactures rebar directly from scrap and has a higher yield of 99% vs AGHA’s current yield of 94%, minimizing waste in the process. Management expects topline to grow to over Rs150bn in the long run (FY22: Net revenue Rs25.6bn) as a result of the new mill.
Margins likely to remain under pressure in the near term
For FY23, management expects topline growth on the minimal side, despite decline in volumes so far while sales volume in 2HFY23 would likely be better as reconstruction activities post floods would start.
On the cost side, as steel scrap is close to 60% of a rebar manufacturer’s manufacturing costs, hence a key risk is the continuation of sharp PKR deprecation against the US$, limiting steel manufacturers’ capacity to pass the burden to consumers, restraining margins. The company is also facing higher electricity rates compared to previous quarters. Hence, pressure on company’s bottom-line is expected to continue in FY23.
AGHA however has some cushion compared to peers as it has the ability to use a variety of scrap, thanks to its flexible blending facility. AGHA has usually preferred to import scrap from UAE as it arrives earlier compared to other sources, company even pays a US$10-15 premium for the scrap. Having said that, the avenue is not available at the moment due to export ban from UAE. The company’s target market is South (80% in the mix) where prices are slightly better (South rebar prices are at Rs215k/ton VS North Rs208-212k/ton). We believe, as macro clarity emerges, an improving demand outlook could bode well for the sector.