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

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  • 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

    inte