• New FV of OMR0.296 provides limited upside We increase our FV for Al Jazeera Steel to OMR0.296 from OMR0.200 as we raise our 2016 earnings estimates after the stronger-than-expected 2Q16 earnings, which were mainly driven by: i) solid margins, on favourable steel price trend; and ii) volume growth. However, margin sustainability is less likely, in our view, given steel price volatility. The stock is trading at a normalised 2017e P/E of 10.5x, and our new FV implies only 10% upside potential; hence, we maintain our Neutral rating. Sustained strong margins and volumes Q-o-Q are key upside risks to our estimates.
• 2016e earnings to double Y-o-Y, but to retreat 22% in 2017e We raise our 2016 earnings estimate to OMR4.1mn (vs. OMR1.7mn in 2015) up from OMR2.2mn on our higher EBITDA margin estimate of 10.5% (+4.5 pp Y-o-Y), due to the improved margin over the past two quarters. We also expect capacity utilisation of 59.0% in 2016 (vs. 46.2% in 2015). However, we conservatively estimate EBITDA margin to retreat to a normalised level of 7.3% in 2017, as we assume competition pressure to re-emerge. AJSP maintains a strong balance sheet position, with a net debt/equity of 0.2x, which should help it maintain a dividend pay-out of 65% over the medium term, which implies a 2016 DPS of OMR0.02 and 7.4% yield.
• 2Q16 earnings surge on volume, margins; to pay interim dividend AJSP reported its strongest ever quarterly net profit of OMR1.87mn in 2Q16 (+112% Y-o-Y, +109% EFGe). Revenue inched up 2% Y-o-Y to OMR20.4mn, 13% above our estimate, supported by volume growth on weak imports from emerging markets into GCC. Capacity utilisation soared to 73% (vs. 54% in 2Q15, 53% EFGe), and EBITDA margin reached 14.4% (+6.4pp Y-o-Y, +5.0pp EFGe). The company’s BoD proposed a DPS of OMR0.014 (22 August ex-date) for 1H16, implying a 5.2% non-annualised yield and 65% pay-out.

Sameer Kattiparambil
Tarek El-Shawarby