• Reduce FV to OMR0.151 on demand recovery concern We cut our fair value for Al Jazeera Steel (AJSP) to OMR0.151 from OMR0.193 as we suspect demand recovery to prolong for AJSP products due to: i) sustained slump in global steel demand, leading to rising competition and thus margin pressure; and ii) slowdown in regional construction activities. Our new FV implies 8% upside to current share price; hence, we reiterate our Neutral rating. AJSP currently trades at 2016e P/E of 12.8x, in line with peers. Better than estimated capacity utilisation and any significant improvement in export business are key upside risks to our estimates.
• 2016 earnings to drop 20% Y-o-Y on revenue and higher tax We expect 2016 earnings to drop 20% Y-o-Y to OMR1.4 million on: i) lower revenue (-9% Y-o-Y), entirely price-driven, as we estimate flat sales volume on sustained strong competition in the short term; and ii) higher taxes in 2016 on recent rise in standard tax rate to 15% (12% previously) and as 2015 tax was exceptionally low due to a one-off tax adjustment over previous years. We estimate a 70% dividend pay-out in 2016 (66% in 2015) on improved balance sheet, which implies a DPS of OMR0.008 and 5.5% yield. AJSP is facing anti-dumping charges in the US and negotiations regarding this are underway. Even in the worst-case scenario the impact would be minimal as it generates less than 15% of its revenue from the US.
• Balance sheet remains strong AJSP reduced its net debt by 38% in 2015, which now stands at OMR5.2 million, and implies net debt to equity of 0.13x (the lowest level in the last decade). Also it utilises only 50% of its installed capacity and thus does not require any large capex in the medium term; hence, this should help maintain its solid balance sheet and support a 60% dividend pay-out in the medium term, in our view.

Sameer Kattiparambil
Tarek El-Shawarby