• Time to wait for stock price to correct before entering We lower our FV for Jazeera Steel to OMR0.258 from OMR0.296 as we slightly cut our earnings estimates following the 3Q16 results, and as we roll our valuation one year forward. The significant Q-o-Q earnings volatility in 2016, largely due to steel price volatility, is a concern and will be an overhang on share price performance, in our view. Even though it is trading at a reasonable valuation (2017e P/E of 8.9x, 7.3% dividend yield) we remain Neutral as we await a lower share price, given the volatility factor, to enter. Any significant volatility in steel prices and/or sales volume are potential risks.
• 2017 volume to inch up, but margins to be hit… We expect its 2017 sales volume to grow +3% Y-o-Y supported by recently-added rebar products. Lower imports from emerging markets (capacity reduction in China and demand revival in India) should partly offset weaker demand in the region and should support a price increase, in our view. We expect consolidated utilisation level to reach 56% in 2017 vs 54% in 2016 and prices to hike 19% Y-o-Y. However, we assume 2017 net profit to fall 8% Y-o-Y on margin contraction given increased steel prices, cost pressure from new product line as well as the new power tariff. We expect the EBITDA margin to retreat by 2.5pp Y-o-Y to 7.5% in 2017.
• …but healthy balance sheet & cash flow offer strong dividend yield We believe Jazeera Steel has a healthy balance sheet (debt only related to working capital; 0.3x debt/equity), strong cash flow (8% average FCF yield over our forecast horizon) and low capex requirements (utilisation below 60%) over medium term, which will help maintain its dividend pay-out at 65%, in our view. This translates to a DPS of OMR0.018 in 2016 and OMR0.017 in 2017 and yields 7.9% and 7.3%, respectively, which offers downside support in the short term, in our view.

Sameer Kattiparambil
Tarek El-Shawarby