Bangladesh Steel Re-Rolling Mills Limited - City Bank ?? · Bangladesh Steel Re-Rolling Mills Limited is the first fully automatic ... The company also holds 31.2% in BSRM Steels Limited, which is a listed entity.

  • Published on
    03-Feb-2018

  • View
    213

  • Download
    1

Transcript

  • City Bank Capital - Company Insight Bangladesh Steel Re-Rolling Mills Limited

    (DSE: BSRMLTD, Bloomberg: .)

    26 April 2015

    IPO Notes on Bangladesh Steel Re-Rolling Mills Limited

    We initiate this IPO short note on Bangladesh Steel Re-Rolling Mills Limited

    (BSRMLTD) with no assigned rating and target price. The company will be listed

    with both bourses on 27 April 2015 under N category. The financial year is

    December-ending. BSRMLTD raised BDT 657.6 mn through IPO and the fund

    will be utilized for payment of retention money for machinery (33.5%), building

    finished goods storage shed (25.4%), loan repayment (31.0%), and IPO

    expenses (10.1%). On Pre-IPO basis, the company is being listed with ROE of

    10.1% (for 2013, P/E of 6.9x and P/TBV of 1.4x (based on offer price of BDT 35.0).

    Bangladesh Steel Re-Rolling Mills Limited is the first fully automatic

    re-rolling mills built in the country, under the flagship company of BSRM

    Group. It was established in 1952 as a small manually operated rolling. In

    1984, the old plant was dismantled and commissioned with fully automatic

    machinery from UK with enhanced annual production capacity of 60,000

    MT. In 2004 another BMRE was made and the production capacity

    increased to 120,000 MT introducing high quality 60-grade re-enforcing steel

    to facilitate heavy construction in Bangladesh. In 2011, BSRMLTD

    amalgamated with Meghna Engineering Works Limited (MEW) another

    concern of BSRM Group engaged in billet making. Since the amalgamation,

    the two companies carries out business as a single legal entity and operates

    as two separate units (for administrative purpose only).

    BSRMLTD produces a low carbon weldable quality high strength and high

    ductility concrete reinforcing bar that is now extensively used all over

    Bangladesh. It produces 60 grade and 40 grade MS bars, angles, channels,

    I-beam, and great-beam. After the BMRE, it will also be able to produce 500

    grade rebar. The capacity utilization was 89.0% as of December 2013.

    Ongoing Expansion / BMRE

    The BMRE program is going on in the mill to enhance its capacity from

    120,000 MT to 450,000 MT per annum to cater the growing demand of

    quality steel in the country. After BMRE, BSRMLTD will be the largest mill of

    its kind in the country having capacity of producing large variety of steel

    products under one facility using the latest technology. The machinery will

    be bought from renowned suppliers of Italy, Taiwan, China and India. After

    modernization, BSRMLTD will be able to produce hot rolled bars, Thermo

    Mechanically Treated (TMT) bars, Angles, Channels, Flats, Shafts and

    Tees.

    The estimated project cost for the expansion stands at BDT 5,863.7 mn

    (USD 75.4 mn). A term loan was arranged through two syndications of

    Banks and FI leaded by United Commercial Bank and One Bank. An

    amount of BDT 1,281.72 mn of term loans out of BDT 3,385.78 mn was

    already incurred as cost. Before receiving IPO proceeds, BMRE of the mill

    will be almost complete against the internal resources and bank loan.

    Accordingly the company shall utilize IPO fund for part payment (retention

    money) for machineries, construction of finished goods storage, IPO

    expenses and the balance amount for repayment of bank loan.

    Bangladesh Steel Re-Rolling Mills Limited Offer Price: BDT 35.0 per share [BDT 25 premium]

    BUY: below BDT 65.0, Sector: Engineering (construction)

    Source : Company Report, DSE and CBC Research , April 2015

    * Disclosures: A section at the end of the report is furnished for important required disclosures, including potential conflict of interests.

    Company Insight

    BMRE Cost BDT mn %

    Total 5,863.7 100.0%

    Term Loan 3,385.78 57.7%

    Own Source 1,886.41 32.2%

    IPO Proceeds 591.51 10.1%

    Authorized Number of Shares, mn 500.0

    Authorized Capital, BDT mn 5,000.0

    Pre IPO Number of Shares, mn 155.9

    Pre IPO Paid Up Capital, BDT mn 1,558.5

    Post IPO Number of Shares, mn 173.4

    Post-IPO Paid Up Capital, BDT mn 1,733.5

    Face Value (BDT) 10.0

    New shares Issued through IPO, mn 17.5

    IPO Size including Premium, BDT mn 612.5

    Offer Price, BDT (including BDT 25 premium) 35.0

    IPO Market Lot (no lot maintained in trading) 200.0

    Directors Holding (post IPO), % 58.4

    Institution & Foreign, % 32.3

    Free Float, % 41.6

    Lock-in Share, % 89.9

    Financial Year End December

    Listing Date NA

    Tangible Book Value (Post IPO), estimated 25.2

    Twelve Month PAT, BDT mn 788.7

    Twelve Month EPS, BDT (pre IPO) 5.1

    Twelve Month EPS, BDT (post IPO) 4.5

    Twelve Month P/E, X (pre IPO @ Offer Price) 6.9

    Twelve Month P/E, X (post IPO @ Offer Price) 7.7

    Price /BV, X (post IPO @ Offer Price) 0.7

    Price /T BV, X (post IPO @ Offer Price) 1.4

    USE of IPO Proceeds BDT mn % of Proceed

    Payment of Retention Money (For Machinery)

    220.2 33.5%

    Finished Goods Storage Shed 167.3 25.4%

    Loan Repayment 204.0 31.0%

    IPO Expenses 66.1 10.1%

    Total 657.6 100.0%

    Peer Cos NOSO Mkt Cap Price 12M' PAT PE

    mn BDT mn BDT ps BDT mn X

    BSRMSTEEL

    341.78 22,693.86 66.4 1,239.2 18.3

    RSRMSTEEL

    65.52

    3,027.02 46.2 155.0 19.5

    SALAMCRST

    98.37

    2,646.18 26.9 87.2 30.3

    W. Peer Avg. - - - - 19.1

    BSRMLTD, relative valuation

    12M' EPS 4.5

    Peer Avg. Multiples 19.1

    Price for BSRMLTD 87.1

    Relative Valuation for BSRMLTD: BDT 87.0 per share

    Source : Company Report , DSE and CBC Research , April 2015

    Shareholding as per DSE data

    Sponsor/Directors 58.4%

    Institutions 1.0%

    Foreign 31.3%

    Public 9.3%

    Free Float 41.6%

    This report was published before any financial disclosure for 2014, was made publicly available by DSE

  • 2

    Bangladesh Steel Re-Rolling Mills Limited

    (DSE: BSRMLTD, Bloomberg: ...)

    26 April 2015

    Key revenue and investment drivers for the company:

    BSRM Group is the strongest brand and market leader in the local industry. The market share of the Group in quality steel production is about 26% as of

    December 2013.

    Due to the economic development the demand for MS rod is increasing day by day. In Bangladesh annual demand for quality rod is estimated at more than 2.5

    mn MT, where country usually consumes over 1.7 mn tons of MS road (or 70% of

    its annual demand in the peak season).

    BSRML is undergoing a balance modernization rehabilitation and expansion program to enhance its annual production capacity from 120,000 MT to 450,000

    MT (+275% Capacity expansion) to meet up the growing demand of MS rods in

    the country.

    In 2013 the companys revenue was BDT 8,602.4 mn. For increasing revenue, they started BMRE program that help them to increase capacity.

    As per the prospectus, BSRMLTD was planning to make equity investment of BDT 1.32 bn in BSRM Steel Mills Limited. This is a proposed project for the

    production of 862,000 MT MS Billet per year. Land acquisition for the project has

    already completed and other installations are continuing in full swing. The project

    is expected to go into commercial operation from January 2015.

    The company also holds 31.2% in BSRM Steels Limited, which is a listed entity.

    On average COGS is 94% of the revenue, so the margin can be enhanced through higher efficiency and any fall in input costs (like price of scrap and billets,

    both procured at lower price locally and internationally).

    Several projects (like flyovers in Dhaka & Chittagong, Dhaka Elevated Expressway, Dhaka-Chittagong 4-lane project including its bridges and culverts,

    Saidabad Water Treatment Plant 2nd Phase, Purbachal Housing Project, Tongi-

    Bhairab double way Rail line and many power plant projects) require huge

    quantity of MS Re-Bars. The biggest opportunity for Bangladesh Steel Sector is

    that there is enormous scope for increasing consumption of steel in almost all the

    sectors.

    Key risk and challenges:

    Potential dilution of BSRMLTD shares - conversion of debt securities hold by institutions will create dilution effect (i.e. on EPS and BV) by about 3.2% on post

    IPO no of shares. Additional number of shares of 5.59 mn will be added to post

    IPO number of shares of 173.4 mn (to total of 178.9 mn).

    As of December 2013, the company has BDT 5,529.9 mn outstanding loans. Steel industry being a capital intensive is heavily dependent on debt fund. Fluctuation of

    interest rates (cost of borrowed funds) affects the profitability as well as liquidity

    position of a company. Debt repayment through IPO proceeds will only reduce its

    interest bearing debt to assets ratio to 24.7% from 26.2%.

    BSRMLs business and profitability from core operation has been consistently reducing as observed from the trend of last three years. Revenue growth for 2013

    was negative 38.7% YoY and only 4.1% positive growth in last 3-years. Such kind

    of substantial revenue fall in 2013 was due to fall of delivery of external product

    coupled with reduced price of final product.

    The company collects its raw materials from its sister concerns and overseas countries. So the rise in input can only be compensated through increasing the

    selling price without compromising the quality. Such increase in price may push

    the company to sell the graded rod at comparatively higher prices lowering its

    market competitiveness.

    Many companies started production of high grade MS Rod & other MS products and selling thereof. Among them 2/3 companies are emerging as giant in respect

    of investment in this sector and others are in the process to increase their

    production capacity. Expected high competition in the markets where the

    Company sells its products may erode its market share and may result in reduced

    prices and thereby may negatively affect BSRMs revenues and profitability.

    Vulnerable political situation that experienced in the recent time has adversely affected the industry. This situation may come any time thus the company is

    exposed to political instability risk.

    Source : Company Report and CBC Research , April 2015

    Revenue breakdown (for 2013)

    Bangladesh has around 300 steel producing factories where 200 are re-rolling mills.

    Bangladesh's annual demand for quality rod is estimated at more than 2.5 mn MT, where country usually consumes over 1.7 mn tones of MS road (or 70% of its annual demand in the peak season).

    The expected growth rate is approx. 10%.

    BSRM Group is the market leader in the steel sector.

    The main competitors are Abul Khair Steels Limited (AKS), Kabir Steel Re-Rolling Mills Limited(KSRML), Seema Steel Re-Rolling Mills Limited(Seema) , Rahim Steel Mills Limited(RSML), GPH Ispat Limited (GPH), Ratanpur Steels Limited, Baizid Steel, Anwar Ispat Limited.

    These competitors (excluding BSRM Group) are producing about 30% of total quality

    steel demand of Bangladesh.

    Part of the debt will be converted to equity, which will dilute the post IPO number of shares (by 3.2%).

    BDT 5,529.9 mn outstanding loans as of December 2013.

    Revenue growth for 2013 was negative 38.7% YoY and only 4.1% positive growth in

    last 3-years.

    Profitability of the associates will push the earning capacity of the company, conditional to that they pay dividend in cash form.

  • 3

    Bangladesh Steel Re-Rolling Mills Limited

    (DSE: BSRMLTD, Bloomberg: ...)

    26 April 2015

    Sources and Availability of Raw Materials and the Principal Suppliers

    Scrap: Scrap is the main raw materials for the Steel Melting Works, which is imported from abroad as well as from local suppliers. Major scrap & sponge iron

    suppliers are Bismillah Enterprise, F.B Steel, J.N Entrerprise, M. Rahman &

    Brothers, Nizam Enterprise, Mansur & Brothers, Muradpur Iron Mart, Pioneer

    Trading, Rayhan Enterprise, JINSU Resources Ltd., TSR Recycling GmbH & Co.

    KG, SIMS Group Global Trade Corporation, Van Dalen International B.V., B.F.R.S

    (UK) LIMITED, Kawamin Pacific PTI Ltd, M/s. Cargill International Trading Pte Ltd,

    Bunty Overseas Pvt. Ltd.

    Billets: Company uses billets as raw materials for its Re-Rolling Mills and SMW cannot fulfill its requirement. Therefore, it has to import billet from abroad as well.

    Major Billets suppliers are M/s. Maithan International, M/s. Patnaik Steels and Alloys

    Ltd, M/s. Super Smelters Limited, S K Network Korea, Deahan Steel Co. Ltd,

    Duferco Asia Pte Ltd, M/s. Concast Bengal Industries Limited, Haldia Steels Ltd,

    Maithan Ispat Limited, Bhushan Steel Limited, M/s Gayson & Co Pvt Ltd, M/s Sesa

    International ltd, Jai Balaji Industries Ltd Unit -2. The new billet making project in

    Mirsarai, Chittagong is expected to be completed at the end of 2014 and then BSRM

    will be able to procure its balance raw material (billet) from this project in addition to

    its existing melting unit.

    Shareholders

    The ownership of BSRM Ltd is mainly concentrated among the sponsor shareholders,

    three institutional shareholders and other shareholders including employees of the

    company of the country. At present, the sponsor directors are holding about 58.4% of the

    company (as per DSE sources).

    Expiry of lock-in provision will create room for share sale by both directors and general

    public (who is now under lock-in provision). So, all issued shares of the issuer at the time

    of according this consent shall be subject to a lock-in period of 3-years from the date of

    issuance of prospectus or commercial operation, whichever comes later. Provided that

    the persons (other than directors and those who hold 5% or more shares in the

    company), who have subscribed to the shares of the company within immediately

    preceding two years of according consent shall be subject to a lock-in period of 1-year

    from the date of issuance of prospectus or commercial operation, whichever comes later.

    Board and management

    The Board of Directors of the company comprises of six Directors and is chaired by Mr.

    Alihussain Akberali. The other members of the Board are eminent personalities having

    diversified business track record. The Board formulates strategic objectives and Policies

    for the company, provides leadership and supervises management actions in

    implementing objectives of the company.

    Mr. Alihussain Akberali FCA, Chairman of the company, graduated in Commerce form

    University of Karachi, Pakistan. He is also the Managing Director & CSE of the company.

    Mr. Akberali is a Chartered Accountant and a Fellow Member of the Institute of Chartered

    Accountants of Bangladesh. He is one of the most experienced industrialists in steel

    sector and a seasoned business entrepreneur. He has been recognized as CIP

    (commercially important person) from large scale industry sector. He is also a Director of

    Chittagong Stock Exchange and Vice Chairman of Chittagong Metropolitan Chamber of

    Commerce and Industry.

    Mr. Aameir Alihussain, son of Mr. Alihussian Akberali, is a director of the company. He did

    his Graduation in Economics from McGill University, Canada and did MBA from LUMS

    University in Pakistan. He joined the family business in 2001 and aims to set high industry

    standards for the performance of the company. He is active in the day to day operation of

    the company as the Managing Director. He is introducing modern management concepts

    in the company and instilling a team spirit to excel in the industry. Ensuring quality and

    focusing on customer satisfaction are his top priorities.

    Lock-In Shares of 155.85 mn (89.9%)

    Source : Company Report, DSE and CBC Research , April 2015

    Directors 54,871,711 31.7%

    260 Employees of BSRM Group 335,400 0.2%

    Shareholders 100,643,927 58.1%

    Lock-in Shares 155,851,038 89.9%

    Saleable Shares 17,500,000 10.1%

    Total Shares 173,351,038 100.0%

    Name Position Country %

    Mr. Alihussain Akbera-

    li, FCA

    Chairman &

    MD BD 14.1%

    Mr. Aameir Alihussain Director BD 11.0%

    Mrs. Bilkis Alihussain Shareholder BD 10.4%

    Mr. Saifuddin Abbas

    Unwala Shareholder UAE 5.4%

    Mr. Iqbal Hussain Shareholder Pakistan 7.0%

    Mr. Abbas Jumani Shareholder UAE 6.4% Mr. Ali Asgar Badrud-

    din Shareholder Canada 12.8%

    H Akberali & Co. Ltd. Shareholder BD 16.9%

    Shareholders, holding 5% or more (total 83.9%)

    Source : Company Report, DSE and CBC Research , April 2015

    Scrap procured from India, Hong Kong, Netherlands, Singapore, UK, USA and internally from sister con-cerns.

    Billets procured from India, Korea, Singapore, and West Bengal of India.

    Major customers are the contractors, property developers, Export Processing Zone, Road and bridge Construction Companies etc.

  • 4

    Bangladesh Steel Re-Rolling Mills Limited

    (DSE: BSRMLTD, Bloomberg: ...)

    26 April 2015

    Associates and sister concern of Bangladesh Steel Re-Rolling Mills Limited

    Source : Company Report and CBC Research , April 2015

    Name of Subscriber Subscribed, BDT mn No of Bond

    Issued %

    Bank Asia 100,000,000 1,000 6.7%

    Farmers' Bank 200,000,000 2,000 13.3%

    Midland Bank 200,000,000 2,000 13.3%

    NRB Commercial Bank 500,000,000 5,000 33.3%

    SABINCO 230,000,000 2,300 15.3%

    Standard Bank 150,000,000 1,500 10.0%

    Bangladesh Commerce Bank 120,000,000 1,200 8.0%

    Total Subscribed 1,500,000,000 15,000 100.0%

    Eastern Bank 500,000,000 5,000 Deadline to subscribe by 8 Jan 2015

    Total Issue Size 2,000,000,000 20,000

    Source : Company Report and CBC Research , April 2015

    Debt Issue to Institutional Investors, BDT 2.0 bn @ Coupon Rate 13.0% (quarterly paid)

  • 5

    Bangladesh Steel Re-Rolling Mills Limited

    (DSE: BSRMLTD, Bloomberg: ...)

    26 April 2015

    Dilution Effect of Debt Securities Conversion on BSRMLTD:

    Trustee: Eastern Bank Limited Source : Company Report and CBC Research , April 2015

  • 6

    Bangladesh Steel Re-Rolling Mills Limited

    (DSE: BSRMLTD, Bloomberg: ...)

    26 April 2015

    Key Ratios and Growth Indicators

    Source : Company Report, DSE and CBC Research , April 2015

  • 7

    Bangladesh Steel Re-Rolling Mills Limited

    (DSE: BSRMLTD, Bloomberg: ...)

    26 April 2015

    Consolidated Income Statement and Balance Sheet

    Source : Company Report, DSE and CBC Research , April 2015

  • 8

    Bangladesh Steel Re-Rolling Mills Limited

    (DSE: BSRMLTD, Bloomberg: ...)

    26 April 2015

    This Document/Report has been prepared and issued by City Bank Capital Resources Limited (CBC) on the basis of the public information available in the market, internally developed data and other sources believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts and information stated in the Documents are accurate as on the date mentioned herein. Neither CBC nor any of its director, shareholder, member of the management or employee in the research team or employee represents or warrants expressly or impliedly that the information or data of the sources used in the document are genuine, accurate, complete, authentic, and correct. Moreover, none of the director, shareholder, member of the management or employee in the research team or employee represents in any way be responsible about the completeness, authenticity and correctness of the sources that are publicly available to prepare the Document. It does not solicit any action based on the materials contained herein and should not be construed as an offer or solicitation to BUY or SELL or SUBSCRIBE to any security. If any person takes any action relying on this Document, shall be responsible solely by himself/herself/themselves for the consequences thereof any claim or demand for such consequences shall be rejected outright by CBC or by any court of law.

    Disclaimer

    Analyst

    Mehedee Hasan +88 01730 727 941 mehedee@cbcrl.com Head of Research

    Moinul Amin +88 01911 993 469 moinul.amin@cbcrl.com Analyst

    City Bank Capital: Recommendation Definitions

    OUTPERFORM Expecting positive total returns of 15% or more over the next 12 months

    MARKET PERFORM Expecting total return range from 0% - 15% (below 15%) over the next 12 months

    UNDERPERFORM Expecting negative total returns of 10% or more over the next 12 months

    HOLD Stock trading at/around its intrinsic value, but has positive upsides

    NOT RATED Stock is not within regular research coverage

    Analyst Certification All of the views expressed in this document accurately reflect the personal views of the responsible analyst(s) about any and all of the subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report.

    *Total Return = Dividend Yield + Capital Gain

    Contact City Bank Capital Resources Limited (subsidiary of The City Bank Limited) 10, Dilkusha, Jibon Bima Tower (1st Floor), Motijheel, Dhaka -1000, Bangladesh Land Line: + (880)-2-9565925 | Fax: + (880)-2- 9585377 | Web: http://www.cbcrl.com

Recommended

View more >