TAURUS

INSIGHT—Agha Steel Industries Limited (AGHA) SECURITIES LIMITED

A Subsidiary of National Bank of Pakistan

Monday, September 18, 2023

Rating BUY Dec’24 Target Price PKR 25 Shares 605 million

LDCP PKR 9.5 Valuation Method DCF Market Cap. PKR 6Bn

Upside 2.6x Free-Float (%) 25% 52-Week Range PKR 9.0—PKR 17.0

Ticker AGHA Industry Engineering Sponsor Agha Family

12 Month Relative Performance of AGHA

Robust growth in sight, warrants a ‘BUY’.
Volume (RHS) KSE-100
 We update our investment case on AGHA based on the re- 15% AGHA 5,000

cent announcements, maintaining a ’BUY’, with a Dec’24 TP 5% 4,000

of PKR 25/sh., offering an upside of ~2.6x over the LDCP. -5%
3,000
The stock is currently trading at a forward P/E (x) of 2.5x. -15%
2,000
-25%
 Our thesis is primarily based on AGHA being the most effi- 1,000
-35%
cient steel producer in Pakistan, enjoying a relative cost ad-
-45% -
vantage through utilization of DRI compared to its peers. Sep-22 Dec-22 Mar-23 Jun-23 Sep-23

 Moreover, the Company boasts significant earnings growth Source: PSX and TSL Research

potential going forward, stemming from the flagship MiDA Key Metrics FY22A FY23E FY24F FY25F FY26F
Sales (Mn) 25,648 22,172 32,044 42,412 47,963
project and the recently announced plans to acquire a Mini
EBITDA 4,849 5,245 7,819 11,646 13,774
Blast Furnace along with venturing into iron ore explora- PAT 1,855 1,104 2,524 4,697 6,444
tion. These initiatives are likely to lessen AGHA’s reliance EPS (PKR) 3.07 1.83 3.83 7.47 10.43
on imported scrap as well as help target exports—boding DPS (PKR) - - - 0.50 1.00
Gross Margin 21% 24% 24% 28% 29%
well for stronger and sustainable margins in future.
Net Margin 7% 5% 8% 11% 13%
Tapping indigenous iron deposits for making steel— Sales (Mn Ton) 0.17 0.13 0.17 0.22 0.25
ROE (%) 12% 7% 13% 19% 22%
a game changer for the industry ROA (%) 4% 3% 6% 9% 11%
 As per a notice, AGHA has entered into an agreement to P/E (x) 4.40 5.21 2.48 1.27 0.91
P/B (x) 0.52 0.34 0.29 0.24 0.19
purchase a 50 cubic meters (m3) ‘Mini Blast Furnace’ which
EV/EBITDA 7.90 6.84 5.06 3.95 3.72
will enable it to produce pig iron from domestically sourced EBITDA/Ton 28 42 47 52 55
iron ore, reducing its overall imported scrap requirement. Source: Company Accounts & TSL Research

 We believe the furnace may become operational within 12- Expected EPS & GP Margin post Blast Furnace
15 months with an estimated CAPEX of ~PKR 1-1.5Bn, Particulars FY24E FY25F FY26F
Previous case - EPS 3.83 6.15 8.56
which is expected to be financed entirely through equity. In
Revised case - EPS* 3.83 7.47 10.43
addition, the MiDA project is also expected to commence Previous case GP (%) 24% 25% 25%
testing very soon, with likely commissioning in 3QFY24. Ac- Revised case - GP* 24% 28% 29%
cordingly, we expect AGHA’s gross margins to increase Source: TSL Research

markedly going forward along with uptick in market share. * Post Mini Blast Furnace Commissioning

 Mini Blast Furnaces are widely recognized for their cost effi-
ciency on a global scale. China is the leading nation with Mustafa Mustansir AC
over 1,000 such furnaces currently in operation which ac- Abdul Basit AC
count for a third of its requirement for steel production. research@taurus.com.pk
92-021-35216403
Please refer to the end of the report for Analyst Certification and important disclosures . 1
www.JamaPunji.pk
 TAURUS
INSIGHT—Agha Steel Industries Limited (AGHA) SECURITIES LIMITED
A Subsidiary of National Bank of Pakistan

REP- 040
Insight—Company Update—Agha Steel Industries Limited Monday, September 18, 2023

 The inclusion of the Mini Blast Furnace is estimated to decrease the

Key Features of Mini Blast Furnace
Company's scrap needs by 10% and reduce energy requirement by
Uses iron ore as the source of material and
coke as the main fuel and sources of energy. ~15%. This metallurgical furnace has been engineered to transform
It is Easier to produce clean steel. iron ore into refined pig iron, prepping it for use in steel production.
It requires continuous feeding, continuous
tapping, and is suitable for large-scale  Iron ore, fuel coke, and limestone are the raw materials used in the
continuous manufacturing. blast furnace. Smelting 1 ton of pig iron requires 1.5-2 tons of iron ore,
It reduces energy requirements due to
efficient production. 0.4-0.6 tons of coke, and 0.2-0.4 tons of limestone. Hence, producing
Its operation and maintenance is similar but one ton of pig iron requires ~2-3 tons of raw materials.
more flexible than conventional large BF.
Source: TSL Research  The blast furnace would reduce AGHA’s reliance on imported scrap
which is available at higher rates. We estimate the delta between lo-
Expected Yield - Post MiDA Commissioning cally procured & processed iron and imported steel scrap to be ~USD
100%
+ 5% 150/ton, resulting in higher gross margins for the Company once the
98%
project is commissioned, going forward. Moreover, heat from the
96%
molten iron could also be channeled to meet other energy require-
94%
ments of the Company. The furnace is expected to have a capacity of
92%
90%
producing ~60K tons of pig iron annually.
94%

99%

88%  Estimated CAPEX for the project is likely to range ~PKR 1-1.5Bn.
Before MiDA After MiDA*
Wherein, we believe the proceeds raised from the issuance of prefer-
Source: Company Announcement & TSL Research
ence shares may be utilized to finance the project. Nevertheless, we
expect AGHA’s gross margins to average ~28% FY25 onwards. Pro-
Billet & Rebar Off-takes (Mn ton)
duction process of a Mini Blast Furnace can be seen below.
0.30 Rebar Billet
0.25
0.20
0.15
0.10
0.05
0.00

Source: Company Accounts & TSL Research

Source: IIMA
Please refer to the end of the report for Analyst Certification and important disclosures . 2
 TAURUS
INSIGHT—Agha Steel Industries Limited (AGHA) SECURITIES LIMITED
A Subsidiary of National Bank of Pakistan

REP- 040
Insight—Company Update—Agha Steel Industries Limited Monday, September 18, 2023

Iron ore mining to optimize supply chain, unlocking value

 AGHA has also partnered with mine owners in KPK for exclusive
raw material supply for its blast furnace. Further, the Company also
aims to explore export opportunities for exporting of iron ore.
 Pakistan has ~2Bn tons of iron ore deposits of various grades. Of
which 60-65% of the reserves are reported to be of high grade—a key
requirement for achieving optimum results from the blast furnace.
 The current cost of iron ore is ~USD 120/ton, making it more feasible
in terms of cost for producing rebar locally. Additionally, both the ore
or its processed products i.e. rebar, offer significant export potential.

Mi.Da expected to commence operations in 2HFY24

AGHA Sales Mix
Retail Instituional  We expect Mi.DA to begin its testing phase in the upcoming months,
while commercial operations are expected to commence in 2HFY24.
24% To highlight, Mi.Da is an internationally accepted and accredited
technology, which will allow AGHA to become one of the most cost-
efficient plants in Pakistan. This is the flagship project of phase-II ex-
pansion, estimated to cost PKR 2.7Bn. Successful commissioning of
76% the Mi.Da rolling mill would enable AGHA to enjoy several benefits:
i) increase in re-rolling capacity to 650K tons, ii) improved yields, iii)
Source: Company Management lowest energy consumption, and iv) a compact design compared to a
traditional mill, requiring 49% lesser space.

D/E Ratio - AGHA compared to Peers

Robust earnings growth to overshadow higher finance costs
Company FY21 FY22 FY23TD  We expect AGHA’s bottom line to grow at a CAGR of ~38% in FY24-
AGHA 1.4x 1.5x 1.3x
26 mainly due to increased off-take (76% institutional clients) as de-
ASTL 1.1x 1.2x 1.4x
MUGHAL 1.3x 1.2x 1.1x mand recovers coupled with higher gross margins post “MiDA” ex-
Source: Company Accounts & TSL Research pansion and acquisition of the “Mini Blast Furnace”. Such robust
earnings account for higher finance costs too.
Finance Cost as % of PBT - Peer Analysis
Company FY21 FY22 FY23TD  To note AGHA’s debt to equity ratio stands at 1.3x (9MFY23) com-
AGHA 55% 93% 2.3x pared to 1.4x for ASTL and 1.1x for MUGHAL. Whereas, interest cov-
ASTL 1.2x 1.1x 22.8x er ratio stands at 1.43x compared to 1.04x for ASTL and 2.0x for
MUGHAL 33% 42% 97%
MUGHAL, respectively. Moreover, focus on funding expansion pro-
Source: Company Accounts & TSL Research
jects through equity shall provide respite in long-term borrowings.
 Lastly, the Company has also exercised the call option on its PKR 5Bn
which is expected to have a positive EPS impact of ~PKR 0.8 in FY24.

Key Risks: i) Inability to complete the aforementioned projects in time-

ly manner, ii) lower off-take despite cost-efficiencies, iii) higher finance
cost, and iv) increased supplies from un-graded segment.

Please refer to the end of the report for Analyst Certification and important disclosures . 3
 TAURUS
INSIGHT—Agha Steel Industries Limited (AGHA) SECURITIES LIMITED
A Subsidiary of National Bank of Pakistan

REP- 040
Insight—Company Update—Agha Steel Industries Limited Monday, September 18, 2023

Return on Equity (ROE) - % Return on Assets (%)

Equity ROE(%) - RHS Assets ROA(%) - RHS

12%
70,000 14%
50,000 22% 21% 20% 25% 12%
19% 11% 12%
60,000
20%
40,000 15% 9% 10%
12% 13% 50,000
15% 6%
30,000 8%
40,000 6%
7% 10% 6%
4% 4%
20,000 30,000 3%
5% 4%
10,000 0% 20,000 2%
FY21A FY23E FY25F FY27F FY20A FY22A FY24F FY26F FY28F
Source: Company Financals & TSL Research Source: Company Accounts & TSL Research

Sales Volume (Mn Tons) Gross Margin (%) - Annual Trend

Sales (Mn ton) Growth (%) - RHS 30% 29% 29%

MiDA COD
28%
0.40 33% 34% 50% 28% 2HFY24
9% 30% 25%
0.30 12% 10% 26%
3% 3% 24% 24%
10% 24% 23%
0.20
-28% -10% 22%
21%
0.10 -30% 19%
20%
0.00 -50% 18%

Source: Company Financials & TSL Research Sources: Company Accounts & TSL Research

EBITDA/Ton Debt to Equity (%)

EBITDA EBITDA/Ton - RHS 53 2.25

22,000 50 51 55
47 1.75
17,000 39 45
35 1.25
12,000 31 35
25 0.75
216%

139%

146%

115%

108%

93%

78%

69%

62%

7,000 18 25
0.25
2,000 15
FY20A FY22A FY24F FY26F FY28F

Source: Company Accounts & TSL Research Source: Company Accounts & TSL Research

Please refer to the end of the report for Analyst Certification and important disclosures . 4
 TAURUS
Important Disclosures SECURITIES LIMITED
A Subsidiary of National Bank of Pakistan

Insight—Company Update—Agha Steel Industries Limited Monday, September 18, 2023

SECP Research Entity Notification Number: REP-040

Analyst Certification
The research analyst(s), if any, denoted by AC on the cover of this report, who exclusively reports to the research
department head, primarily involved in the preparation, writing and publication of this report, certifies that (1) the
views expressed in this report are unbiased and independent opinions of the Research Analyst which accurately
reflect his/her personal views about all of the subject companies/securities and (2) no part of his/her compensa-
tion was, is or will be directly or indirectly related to the specific recommendations or views expressed in this re-
port.

The research analyst or any of its close relatives do not have a financial interest in the securities of the subject com-
pany aggregating more than 1% of the value of the company and the research analyst or its close relative have nei-
ther served as a director/officer in the past 3 years nor received any compensation from the subject company in the
past 12 months. The Research analyst or its close relatives have not traded in the subject security in the past 7 days
and will not trade in next 5 days.

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 TAURUS
Important Disclosures...Continued SECURITIES LIMITED
A Subsidiary of National Bank of Pakistan

Insight—Company Update—Agha Steel Industries Limited Monday, September 18, 2023

Disclosure of Financial Interest

TSL or any of its officers and directors does not have a significant financial interest (above 1% of the value of the securities of the subject
company) in the securities of the subject company. However, NBP and BOK, being associates of TSL, may trade or have significant financial
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TSL employs a 3-tier rating mechanism i.e ‘BUY’, ‘HOLD’ and ‘SELL’, which is based upon the level of expected return for a specific stock.
When total return (capital gain + dividends) exceeds 16%, a ’BUY’ rating is assigned. A ‘SELL’ rating is issued whenever total return is less
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Target price risk disclosures

Any inability to compete successfully in the markets may harm the business. This could be a result of many factors which may include (but
not limited to) geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be
materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market
risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company may enter into transactions,
including transactions in derivative instruments, to manage/offset certain of these exposures.

Valuation Methodology
To arrive at our period end target prices, TSL uses different valuation methodologies including

• Discounted cash flow (DCF, DDM)

• Justified price to book (JPB)

• Relative Valuation (P/E, P/B, P/S etc.)

• Equity & Asset return based methodologies (EVA, Residual Income etc.)

SECP JamaPunji Portal link: https://jamapunji.pk/

Frequently Used Acronyms

TP Target Price DCF Discounted Cash Flows FCF Free Cash Flows

FCFE Free Cash Flows to Equity FCFF Free Cash Flows to Firm DDM Dividend Discount Model

SOTP Sum of the Parts P/E Price to Earnings ratio P/Bv Price to Book ratio

P/S Price to Sales EVA Economic Valued Added BVPS Book Value per Share

EPS Earnings per Share DPS Dividend per Share DY Dividend Yield

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