• Raise FV to OMR0.200; remain Neutral on limited upside We raise our fair value (FV) for Al Jazeera Steel (AJSP) to OMR0.200/share from OMR0.151 as we adjust our revenue and margin forecasts post the strong set of 1Q16 results. We now assume the management’s move to explore new markets (like Australia and Jordan) will be volume accretive over the medium term and expect the profit margin to improve as product pricing pressure eases and thanks to cost controls. Even though pricing pressure from Chinese and Indian manufacturers has marginally softened recently, steel price volatility is expected to remain as the demand-supply imbalance will still prevail, in our view. The stock is trading at a 2016e P/E of 11.3x vs peers’ 12.0x, which is close to our FV; hence, we maintain our Neutral rating. Stronger-than-expected volume growth and/or margin are key upside risks to our estimates.
• Margin expansion to lift 2016 earnings We expect AJSP to report 2016 earnings of OMR2.2 mn, up 31% Y-o-Y on EBITDA margin improvement of 125bps to 7.2%; as pricing pressure from emerging markets cools down due to a demand uptick in its local markets and/or rationalising capacity to improve profitability (versus a focus on volume growth earlier). We forecast revenue to fall 2% as price pressure offsets higher sales volumes; we assume capacity utilisation will improve to 50.5% in 2016 from 46.2% in 2015. We expect the lower interest cost to offset the increase in tax expenses. We believe its strong balance sheet (net debt/equity at 0.2x) augurs well for a stable dividend pay-out of 65% (flat Y-o-Y), which implies a 2016 dividend of OMR0.012/share and 5.8% yield.
• 2Q16 preview: expect flat earnings Y-o-Y We expect AJSP to report 2Q16 net profit of OMR0.9mn (flat Y-o-Y) and revenue of OMR18.0mn (-10% Y-o-Y). Even though we expect sales volume to be marginally lower Y-o-Y, we forecast the EBITDA margin to improve by 100bps Y-o-Y to 9.0% as product pricing pressure has marginally weakened over the past few months.

Sameer Kattiparambil
Tarek El-Shawarby