Ezz Al Dekhela (EZDK) [IRAX.CA], a 55%-owned subsidiary of Ezz Steel [ESRS.CA], released its consolidated 1Q16 financial results with a net loss of EGP242mn vs. loss of EGP50mn in 1Q15, profits of EGP87mn in 4Q15 and EFGe loss estimate of EGP324mn. Operational results came in line with our estimates, with EBITDA coming in at EGP317mn (-3% vs. our estimate for EGP326mn) as a healthy gas supply (we estimate at c75%) seemingly supported operations in 1Q16.   While operating results were in line, the company continued to suffer losses during the quarter, mainly as the EGP devaluation that took place in March led to FX losses on the company's FX-denominated loans. We had already anticipated consolidated FX losses for EZDK at EGP335mn in 1Q16, but they came less than our forecast at only EGP244mn. This beat on FX losses was attributable mainly to non-cash FX gains booked at EFS, which we had not accounted for in our estimates.     EZDK 1Q16 results may offer upside to our 1Q16 estimates for Ezz Steel: As for our read into EZDK's 1Q16 financial results, we think the FX gains at EFS could actually pose an upside to our net loss estimate for Ezz Steel in 1Q16. We already assume consolidated FX losses of EGP428mn at Ezz Steel in 1Q16 and a net loss of EGP271mn. With this potential upside, we think Ezz Steel's results will still remain in the red in 1Q16, but could come in with a lower net loss figure of cEGP162mn.   We estimate that the worst is yet to come during the year as: i) gas supply gets cut during the summer months and diverted to cater for higher demand from the electricity sector; and ii) as further devaluation in the EGP could put additional pressure and result in further FX losses. Nonetheless, we see some silver linings playing out in the market today in the form of: i) higher spreads between iron ore and scrap (+35% YTD), which typically indicate higher profitability for DRI-integrated producers such as Ezz Steel; and ii) higher steel prices in major export hubs in China and Europe (+26% YTD). On the issue of gas pricing in Egypt, the government remains hesitant in applying a cut to the gas price from USD7/mmbtu to USD4.5/mmbtu, although an announcement came in that the price reduction could take place in September. We remain skeptical of such a move, given the government's past hesitation.   Despite an expectation for a weak year in 2016, we continue to see value in Ezz Steel and a recovery in earnings by 2017, once gas supply is more readily available. Ezz Steel is now trading at a depressed 2017e PE multiple of 6.2x; hence, we reiterate our Buy rating on the stock. (Earnings release, Ahmed Hazem Maher)   Ezz Steel: EGP7.67 as of 04 July 2016, Rating: Buy, FV: EGP12.00 per share, MCap: USD469mn, ESRS EY / ESRS.CA