• Global values JOST at JD2.04/share and recommends a BUY on the stock.
Global Investment House – Kuwait – Initial Coverage Report- Jordan Steel Company (JOST) was established in 1993. The company specializes in the production of Concrete Reinforcement Steel Bars (Rebars) and Flat/Square bars (Merchant Steel), with a design capacity of 250 thousand tons per annum. Jordan steel is the largest steel manufacturing company in Jordan. Jordan Steel has three subsidiaries, Jordan Steel Engineering Industries, Consolidated Jordanian Iron and Steel Works Company and Modern Wire Mesh Company. The ownership in the subsidiaries ranges between 60-100%.
The value of JOST’s shares derived from the weighted average of the DCF and relative valuation methods is JD2.04 per share. The stock closed at JD1.60 on the Amman Stock Exchange at the end of trading on 8th January 2009, which implies that the weighted average value of JOST’s shares is at a premium of 27% to the share’s current market price. At their current price, JOST’s shares have a P/E multiple of 6.2x and 8.7x for 2008 and 2009 respectively. We therefore recommend a ‘BUY’ on the Jordan Steel Company’s stock at its prevailing price levels.
Financial Performance
Company’s sales revenue continued to rise over the years. The growth in the revenue was because of increase in the sales volume and the sales price. Company’s sales volume increased at a CAGR of 17% during 2003-07 while sales price increased at a pace of 14% during the same period. As a result, the company was able to increase its revenue from JD24mn in 2003 to JD73mn in 2007. In 2007, the volume growth was however minimal but there was a striking price rise. Price per ton of the Rebars grew by 19% to JD405 per ton as compared to JD339 per ton in 2006. In 2008, the company witnessed an outstanding increase in the price of the commodity on the back of ever increasing demand by the construction and real estate activities. However, by the end of 2008, the prices had come down dramatically on the back of prolonging financial crisis.
Company’s cost of sales increased during 2003-07 at a CAGR of 36% higher than the growth in the sales revenue. The company having no smelting plant fell prey to the rising prices of the raw materials such as billets and oil. In 2007, company’s cost of sales increased by 17% to JD66.6mn as compared to JD57mn in 2006. Gross profit grew at a CAGR of 7% during 2003-07 and in 2007 it increased to JD6.3mn as compared to JD4.3mn in 2006. The Company was able to maintain better gross margins in 2007 as compared to 2006 of 8.7% as compared to 7.1%.
In a proposition to expand its business and lower its cost of sales, JOST fully acquired the Jordanian Iron and Steel Company in early 2008. The latter company produces steel billets from steel remelt scrap. The scrap used by JOST is the residual scrap, or what is called Heavy Metal Scrap HMS1, generated by factories from their production processes and is classified as a low-cost material in producing steel. The availability of residual scrap in Jordan is high and thus JOST obtains most of its needs from the local market, although a small amount is imported. As a result, of acquiring the new plant, the company would be able to save JD8.8mn in 2008 to a maximum of JD18.7mn by the end of 2012 as per our projections.
Net Income of the company has grown at a CAGR of 10% during 2003-07. The net income of the company for the year 2007 rose by 48% to JD5.6mn (EPS: JD0.16) as compared to JD3.8mn (EPS: JD0.11) in 2006. Net margins of the company rose heavily in the wake of rising revenue and continued cushion from the other income. Company net margins for 2007 rose from 6.2% in 2006 to 7.8% in 2007.
Company’s asset size has continued to increase. Assets rose from JD30.5mn in 2003 to JD58.8mn at the end of 2007, at a CAGR of 18%. In 2007, the company’s assets increased by JD6.7mn (13%). The increase in assets was on account of increase in the investment in associates from JD11.1mn to JD13.2mn. Other factors accounting for the increase in the asset base were the rise in the current asset portion from JD28.9mn to JD34.3mn, an increase of 19%.
The planned capital expenditure in the smelting plant and the new production line is set to improve JOST's margins, against falling steel prices by focusing on reducing the company's reliance on external sources for expensive billets, in addition to capturing prices advantages offered by comparatively cheaper natural gas prices. Steel prices are volatile and are influenced by the irregular cost trends of key raw materials like iron ore, coal and scrap. The unpredictable cost trends of the key raw materials represent both upside and downside risks for the company. Consequently, average selling prices are a major factor in determining the company's earnings and valuation. Local selling prices in general are expected to track the fluctuations of global selling prices, given the strong reliance of local steel producers on the global market.
Jordan Steel Company is forecasted to report a revenue and earning CAGR of 2% and 17% respectively. Rapid earnings growth during the years 2008-12, increasing at a CAGR of 17% is because of the smelting plant. Gross margins of the company are expected to improve because of the backward vertical integration. However, we expect profitability to drop in the year 2009. The drop in 2009 will be a result of fall in the sales volume and declining price due to slowdown in the regional and international real estate and construction activity.
