Bangladesh Steel Re-Rolling Mills Limited - City Bank · PDF fileBangladesh Steel Re-Rolling...

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 company’s 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%.

BSRML’s 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 BSRM‟s 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



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 Billet’s 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%)


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%)


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



26 April 2015

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


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


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

5



26 April 2015

Dilution Effect of Debt Securities Conversion on BSRMLTD:

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

6



26 April 2015

Key Ratios and Growth Indicators


7



26 April 2015

Consolidated Income Statement and Balance Sheet


8



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 [email protected] Head of Research

Moinul Amin +88 01911 993 469 [email protected] 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

Bangladesh Steel Re-Rolling Mills Limited - City Bank · PDF fileBangladesh Steel Re-Rolling...

Documents

Transcript of Bangladesh Steel Re-Rolling Mills Limited - City Bank · PDF fileBangladesh Steel Re-Rolling...