Equity Note on Bangladesh Steel Re-Rolling Mills … Insight on...BSRM Steels Limited. Presently, BSRM Steel holds 95% shares of the BSRM Iron & Steel Co. Limited. Industry Overview

Equity Note on Bangladesh Steel Re-Rolling Mills Limited Date: October 16, 2016

Current Price (BDT): 152.7 Resistance: 192.7 MFI: 14.5

Support: 154.0 RSI: 25.4

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EBL Securities Limited Research

2013 2014 2015 2016

HY, An.

Financial Information (BDT mn):

Net Sales 8,602 8,050 7,802 19,428

Operating Profit 285 -59 207 2,116

Profit After Tax 789 116 828 1,177

Assets 21,299 22,766 26,940 31,725

Long Term Debt 1,406 4,056 4,168 3,273

Equity 8,274 8,564 9,804 10,310

Dividend (C/B)% -/- 10/0 5/10 N/A

Margin:

Gross Profit 5.8% 2.3% 5.9% 14.0%

Operating Profit 3.3% -0.7% 2.7% 10.9%

Pretax Profit 13.3% 0.2% 12.0% 9.2%

Net Profit 9.2% 1.4% 10.6% 6.1%

Growth (YoY):

Sales -38.7% -6.4% -3.1% 149.0%

Gross Profit -28.3% -62.5% 144.2% 494.8%

Operating Profit -41.4% -120.8% 449.7% 921.3%

Net Profit 73.8% -85.3% 613.3% 42.2%

Profitability:

ROA 4.1% 0.5% 3.3% 4.0%

ROE 10.0% 1.4% 9.0% 11.7%

Leverage:

Debt Ratio 23.6% 43.7% 55.1% 43.0%

Debt-Equity 0.61 1.16 1.51 1.32

Int. Coverage 1.08 -0.12 0.30 1.75

Valuation:

EPS (BDT)* 4.0 0.6 4.2 6.0

DPS (BDT) -/- 1.0 0.5 N/A

NAVPS* (BDT) 42.4 43.9 55.3 52.8

P/E (x) -/- -/- 31.0 25.3 P/NAV (x) -/- -/- 2.4 2.9

*Based on the current outstanding number of shares.

Half Yearly Update The company has recorded 125.1% growth on YoY basis in

its topline revenue while 217.9% YoY growth in the net profit after tax, in its HY (June ending) audited results, driven by the implementation of BMRE project.

However, revenue on QoQ basis dropped by 20.5% in its latest Q2, 2016 (3 months) results while net profit plunged by 80.3% on QoQ basis compared to Q1, 2016 (3 months) due to sluggish demand in the monsoon season and reduced profit margin.

Increase in the operating expenses, reduction in the share of income from associates and large provision for deferred income tax (BDT223.0 million) in the Q2,2016 (April to June) has reduced the net profit margin of the company from 9.1% in Q1, 2016 (3 months) to 2.3% in Q2,2016 (3 months).

Increase in the Import duty and imposition of VAT on import of billet will further reduce the gross profit margin of the company in coming financial year.

Company Overview

Bangladesh Steel Re-Rolling Mills Limited (BSRMLTD) is the first fully automatic re-rolling mills built in the country. BSRMLTD produces a low carbon weldable quality high strength and high ductility concrete reinforcing bar.

Company Profile

Incorporation: 28 December 1960

Commercial operation: 1961

Key personnel: Mr. Alihussain Akberali (Chairman); Mr. Aameir Alihussain (Managing Director)

Factory Location: Baizid Bostami Road, Nasirabad Industrial Area, Chittagong, Bangladesh

Shareholding Pattern:

Sponsor/ Director

Gov.t Institute Foreign Public

As on Sep 29, 2016 27.47% 0.00% 22.32% 30.58% 19.63%

As on Aug 31, 2016 55.77% 0.00% 5.81% 30.58% 7.84%

As on July 31, 2016 55.77% 0.00% 6.06% 30.58% 7.59%

As on June 30, 2016 55.77% 0.00% 4.77% 30.58% 8.88%

As on Dec 31, 2014 57.11% 0.00% 4.77% 30.58% 7.54%

Listing: 27 April 2015 (Both DSE and CSE)

Business Profile

Key Products: BSRMLTD produces MS products like 60 grade and 40 grade MS bars, Angles, Channels, I-beam, Great-beam, etc. and MS billet (Raw-materials for MS Products).

Business Unit: BSRMLTD is now operating with two different units: (i) Re-Rolling unit for M.S.Rod, Channel, Angle and (ii) Steel Melting Works unit for production of M.S. Billet.

Production Capacity: Currently, annual installed capacity of BSRMLTD is 450,000 MT for Re-Rolling Unit and 135,000 MT for Melting Unit.

Raw-materials: The main raw material for re-rolling mills is billet. The company’s own billet melting plant and its associate BSRM Steel Mills Limited serves as the backward linage for the company.

The main raw material for billet making is scrap which is sourced from Korea, Japan and China as well as from local sources.

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Price- Volume Movement Since LIstingVOLUME ('000) CLOSE PRICE

Company Fundamentals

Market Cap (BDT mn) 29,791.4

Market weight 0.9%

No. of Share Outstanding (in mn) 195.1

Sponsor Holding 27.5%

3 Months Average Turnover(BDT mn) 116.3

3 Months Return 4.5%

52-week price range (BDT) 110.3 - 207.7

Sector Forward P/E 25.3

Trailing 12 Months EPS 6.65




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Subsidiary/Associates Profile:

As on date, the company does not have any subsidiary but has few associates. The company also has indirect control over few other companies, upon which its associate concern has controlling share.

Ownership Flow of BSRM Group companies:

BSRM Steels Limited

BSRM Steel Mills Limited

BSRM Iron & Steel Co. Limited*

Nature of Business

Manufactures M.S. Products

Steel melting plant for producing billet

Manufacturer of M.S. Billets

Production capacity

700,000 MT (per year)



* BSRM Iron & Steel Co. Limited is in the process of merger with BSRM Steels Limited. Presently, BSRM Steel holds 95% shares of the BSRM Iron & Steel Co. Limited.

Industry Overview

Bangladesh has more than 400 steel, re-rolling and auto-re-rolling mills. The government projects account for nearly 40% of total steel consumption.

Market Size: Combined annual production capacity of 8.0 million tones, against the total demand of only 4.0 million tones (market value of BDT 300 bn).

Regional Comparison: Bangladesh is one of the lowest consumers of steel products in the world. Per capita steel consumption in Bangladesh now stands at only 25 kilograms, while it is 55 Kilograms in India and 324 kilograms in developed nations.

Raw-materials: Although a number of companies of the sector, including BSRM, GPH, RSRM, Rahim Steel and Bashundhara Steel, are producing the raw material, billet, locally, around 1.5 mn tones are still imported every year.

Major Industry Players: At present, three big steelmakers -- BSRM, Abul Khair Steel and KSRM -- supply more than 50% of the country's annual need (3.5- 4.0 million tonnes) of steel.

Industry Prospects & Challenges: Over capacity of the steel industry also indicates enormous export potential, though the option is yet to be explored. Since steel demand is derived from other sectors like construction buildings, roads, consumer durables and infrastructure, its fortune is dependent on the

growth of these user industries. However, initiation of Padma Bridge construction, acceleration of Government’s big infrastructure projects under Annual Development Program (ADP) and revival of the local real-estate industry will undoubtedly boost-up the steel consumption locally.

However, uneven competition from big players, price fall in international steel market, encouraging import of finished steel product and a decline in domestic demand for construction materials are forcing the small mills owners out of the market.

Steel Industry in Bangladesh Capital Market: Currently there four industry players, involved in the production of MS Rod, MS Bar and MS Billet, are listed in the capital market. A brief comparison of the listed steel (MS products) manufacturers is presented here:

Companies Paid Up Capital (BDT

mn)

Revenue Net Profit Margin

P/NAV Forward PE

BSRMLTD 1,951 7,802 10.6% 3.24 16.8

BSRMSTEEL 3,418 33,493 6.3% 3.36 9.1

RSRMSTEEL 786 5,503 4.9% 1.07 12.3

GPHISPAT 3,119 5,988 4.9% 4.08 9.1

Investment Insight

Company Positive The company has increased its capacity of the re-rolling

mill from 120,000 MT to 450,000 MT per year with effect from 09 December 2015. Implementation of the said BMRE has enabled the company to enjoy sizable growth as a result of increased revenue from the expanded production.

The commercial production of the company’s 44.97% owned associate BSRM Steel Mills Limited has been started since 16th June 2016. This is the largest billet making plant in the country, with a capacity of 862,000 MT per year. The management of the company expect to get the optimal capacity utilization from the plant by March 2017.

The company’s associate, BSRM Steels Limited is setting up a coal based 150 MW power plant at Mirersarai. The power plant is likely to commence operation by 2018 and will supply electricity to Bangladesh Power Development Board (BPDB) as well to the group concerns. The project will enable BSRM Limited to record increased share of profit from the BSRM Steels Limited.

After modernization, BSRMLTD is now able to produce hot rolled bars, 500 grade Rebar and Thermo Mechanically Treated (TMT) bars along with Angles, Channel, Flats, Shafts and Tees. This high quality product line extension is helping the company to significantly increase the profitability with increased profit margin.

In December 2015, BSRM has launched a new steel rebar 'Maxima', designed for super big structures to cater to the growing needs of mega construction projects in Bangladesh. The company is also going to introduce ASTM 572 and Grade 50 angles, which are used for the manufacture of floor trusses. According to the company sources, the company alone can cater to the annual requirement of steel trusses for the local housing industry.

BSRM Limited gets significant amount of management fees from BSRM Steels Limited for providing management services.

Bangladesh Steel Re-Rolling Mills Limited (BSRMLTD)

BSRM Steels Limited (BSRMSTEEL)

(31.19%)


(44.97%)

BSRM Iron & Steel Co. Limited*

(95.0%)


(25.35%)




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Investment Concern The company is still dependent on imported raw-materials

for a large quantity. The Gov.t of Bangladesh has imposed tariff on import of billet by fixing the price of Billet as BDT 31,200 per ton, 20% revenue duty and 15% VAT. So, the company’s production cost will increased until it becomes self-reliant on sourcing billet.

BSRM Ltd. is heavily exposed to leverage. High interest eats-up a significant portion of its profit before interest and tax. Moreover, the two syndicate loan by United Commercial Bank Limited and One Bank limited of BDT 2790 million and BDT 600 million respectively for the expansion projects has increased interest expenses and the leverage ratio has also surged.

The company is exposed to foreign exchange risk in certain purchases and borrowings. In 2015 net exposure to foreign exchange rate stood at USD 15.86 million (BDT 1.25 billion). Majority of the foreign currency transactions are denominated in USD and relate to Liability for accepted bills for payment.

Pricing Based on Relative Valuation:

EPS* Multiple Value (BDT)

Sector Forward P/E 6.0 17.7 106.8

Peer Forward P/E 6.0 16.8 101.3

Market Forward P/E 6.0 14.7 88.7

Trailing 12 Months P/E 6.0 23.0 138.5

NAVPS Multiple Value (BDT)

Peer** P/NAVPS 52.8 2.13 112.3

Sensitivity Analysis

Price @ 18 PE 6.0 18.0 108.4

Price @ 20 PE 6.0 20.0 120.4

Price @ 25 PE 6.0 25.0 150.5

Price @ 30 PE 6.0 30.0 180.6

*Based on annualized EPS of HY-2016; ** BSRMSTEEL, RSRMSTEEL and GPHISPAT has been considered as peer company.

Concluding Remarks: BSRM Steel Mills is the pioneer in the steel industry of Bangladesh. The BSRM group is the market leader and has strong brand image in the market. Moreover, BSRM has a cost advantage over other competitors as it can procure raw materials from its own steel melting work unit and from its other group companies rather than importing. Implementation of BMRE and investment in other group companies has enabled the company enjoy sound growth in business. Source: Annual Reports, DSE Website, Company website, Interview with company management, the Financial Express, the Daily Star and EBLSL Research

EBLSL Research Team:

M. Shahryar Faiz AVP & Head of Research [email protected]

M. Asrarul Haque Senior Officer-Research [email protected]

Mohammad Rehan Kabir Officer-Research [email protected]

Farzana Hossain Laizu Trainee Assistant Officer- Research [email protected]

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2012 2013 2014 2015 2016 HY, An.

Revenue & Revenue Growth of BSRMLTDRevenue Growth

2.9%4.1%

0.5%

3.3% 4.0%

7.6%10.0%

1.4%

9.0%

11.7%

2012 2013 2014 2015 2016 (HYAn.)

ROE & ROA Trend of BSRMLTDROA ROE

2.33

4.04

0.59

4.24

6.03

2012 2013 2014 2015 2016 (HY, An.)

Historical Restated EPS (BDT)

Disclaimer: This document has been prepared by EBL Securities Ltd. (EBLSL) for information only of its clients on the basis of the publicly available information in the market and own research. This document

has been prepared for information purpose only and does not solicit any action based on the material contained herein and should not be construed as an offer or solicitation to buy or sell or subscribe to any

security. Neither EBLSL nor any of its directors, shareholders, member of the management or employee represents or warrants expressly or impliedly that the information or data of the sources used in the

documents are genuine, accurate, complete, authentic and correct. However all reasonable care has been taken to ensure the accuracy of the contents of this document. EBLSL will not take any responsibility

for any decisions made by investors based on the information herein.

Documents

Equity Note on Bangladesh Steel Re-Rolling Mills … Insight on...BSRM Steels Limited. Presently, BSRM Steel holds 95% shares of the BSRM Iron & Steel Co. Limited. Industry Overview