Aisha Steel Mills Ltd (ASML): Offer For Sale— Bringing Steel Back On The Map – HMFS Research
Added by Baqar Abbas Jafri on July 2, 2012.
Saved under GENERAL INDUSTRIES, HEADLINES, PERSONAL FINANCE
Tags: Aisha Steel Mills, Ali Hussain, Habib Metropolitan Financial Services
By: Ali Hussain, Senior Analyst
Habib Metropolitan Financial Services
The sponsors of Aisha Steel Mills Ltd (ASML) have announced an Offer for Sale (OFS) of 10mn shares (3.73% of Ordinary Share Capital) at PKR10/share. Of the total offering, 9.5mn shares will be available to the general public whereas 0.5mn shares have been allocated to ASML employees. The offering will be conducted on July 3-4, 2012.
ASML was incorporated as public limited company in 2005 as a joint venture between the Arif Habib Group, Metal One Corporation, and Universal Metal Corporation as the majority sponsors. The OFS of 10mn shares is being facilitated by the divestment of ordinary shares by the majority sponsors. The sponsors have also successfully placed 23.4mn shares (@PKR10/share) through the pre-IPO process with various institutional investors. After receiving approval from the SECP, ASML has issued 75.8mn convertible preference shares at PKR10/share to Arif Habib Corporation Ltd. The preference shares are convertible into ordinary shares at ASML’s discretion any time after the Commercial Operating Date (COD) at face value.
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ASML is set up to operate a 220k MT/annum Cold Rolled Coil (CRC) facility in order to provide value added products to the Auto & Allied, engineering, and home appliances manufacturers. The stated capacity is quantified in terms of the stringent Japanese standard of 0.5mm CRC gauge. Given the local market standard of 1.0mm gauge, management is confident that the plant can operate at 269k MT/annum due to the standard differential. The plant is strategically located on a 50acre area at the Port Qasim Industrial Steel Estate and employs state of the art machinery from Japan, Austria and Switzerland. ASML has the only CRC facility in the country that has an Electrolytic Cleaning Line (ECL) which will allow it to cater to the high end automotive and home appliance segments.
The company will procure Hot Rolled Coil (HRC), which is its key raw material, from suppliers across the world, including its sponsors Metal One and Universal Metal Corporations. Power (16.5 MW) to the facility will be supplied through a dedicated 132KVA grid from KESC, in addition to 1.7mmcfd gas via SSGC. The company has established exclusive relationships with 18 dealers to distribute its products. Trial production has already commenced at the plant and the company expects to announce its COD in the first week of July, 2012.
Pakistan Steel Industry—Ripe For the Picking
With Pakistan’s steel per capita consumption of 14.8kg at a steep discount to the regional average of 243kg, the domestic steel market offers substantial growth potential. As per management estimates, local CRC demand is approximately 467k MT, with local production pegged at 175K tons and the remainder satisfied through imports. Given the sizeable demand-supply gap, ASML is presented with a lucrative opportunity to rapidly establish its market share. Furthermore, with importers susceptible to importing sub-standard quality products and long lead times, consumers will welcome ASML’s entry in the market place. Currently there are only two other producers of CRC in the local market i.e. Pakistan Steel Mill (PSM) and International Steel Limited (ISL). With PSMC mired in financial and production issues, ISL is the only noteworthy peer to ASML in the industry. However, with ISL utilizing the majority of its CRC production capacity towards producing Galvanized Rolling Coil (GRC), ASML is poised to establish a strong consumer base from the get-go.
Strategic & Competitive Advantages
? With domestic CRC prices linked to international prices quoted in USD, ASML remains hedged against exchange rate fluctuations, which pose a major risk in the local economy given the dire current account situation
? As a value added producer, ASML is exempt from the 10% import duty applicable to HRC/CRC importers
? ASML’s plant location makes it in close proximity to key customers in the automotive industry. Furthermore, it also allows the company to save on raw material transportation costs and remain relatively insulated to supply chain disruptions caused by the city’s uncertain law and order situation
? The company has established a long term sales and distribution agreement with Mitsubishi Corporation. Given Mitsubishi’s firm roots in the local economy, this alliance will be fruitful for ASML in terms of establishing brand recognition and geographical reach
? With the country’s manufacturing sector suffering at the hands of the power crisis, ASML’s dedicated 132KVA power line, which has a history of 7 minutes of total outage time a year, will ensure production stability. The competitive advantage of this power connection is notable as such that ISL has indicated it is also considering synchronization to the 132KVA grid in light of power disruptions on its existing connection
? ASML plans to enhance its capacity via the addition of four bells to the Batch Annealing Furnace which will enhance capacity to 269k MT/annum. The proposed addition of a Skin Passing line would further propel capacity to 360k MT/annum
? In addition to CRC sales, the company will be able to generate additional revenue by providing leveling and shearing services
? Management intends to develop a Service Center that will serve as one stop shop for the automotive and other value added sectors
? The company seeks to explore forward integration activities by establishing a Coloring Line and Electro Galvanized products
Management Projections—Pleasantly Conservative
ASML management has pegged CRC demand growth at 3.5% in the forecast years which we believe is a reasonable projection given the growth potential of the sector in light of the low per capita consumption. Furthermore, the entry of ASML will not induce a crowding out effect as projected demand will continue to outpace domestic supply by a sizeable quantum. Given the price volatility in the industry, management has conservatively assumed a margin spread of USD88/ton (historical 10-year average) between HRC-CRC along with not incorporating the potential impact of capacity increments. As such, we have relied on management projections for the most part but made adjustments as it pertains to our proprietary outlook on PKR-USD parity and the recent reduction in the minimum turnover tax from 1.0% to 0.5% in Budget FY13.
Given the cyclical nature of the steel industry, we have chosen to value ASML using a relative multiple methodology rather than the Discounted Cash Flow analysis adopted by the company management. With price volatility rampant in the sector, investors are more likely to focus on the near term earnings outlook rather than long term projections which are difficult to forecast. We believe the Price/Book (P/B) multiple provides a reasonable benchmark for capturing current investor sentiment towards the steel sector.
As such we derive our June’13 target price using a blended Price/Book (P/B) multiple, assigning equal weight to the Asia-Pacific regional average for steel companies and ISL, as it is the closest comparable to ASML in the local market. With the Asia-Pacific peer P/B multiple at 0.9x and ISL currently trading at 1.3x, our June’13 target price for ASML stands at PKR13.31/share, implying a 33% upside to the OFS price of PKR10/share. Given the lucrative upside potential in spite of the conservative financial projections, we promulgate a Subscribe stance on the offering.