• Surprise gas price cut, raise 2016e earnings by 120%; reiterate BUY We expect the stock to open strongly today on news that gas prices for steel producers have been cut to USD4.5 from USD7/mmbtu (we previously forecast for a rise in natural gas prices to USD8/mmbtu), which we believe will have a sizeable positive impact on earnings. We raise our 2016 earnings estimates by c120% as DRI integrated facilities should enjoy healthy margin expansion, but we remain conservative on the long-term price of gas and see it returning to USD7/mmbtu in the long term. We believe its valuation is very attractive at only 5x 2016e P/E (at our forecast of only 75% DRI utilisation), but keep our FV at EGP14 i) as we raise our CoE by 250 bps on expectations of rising local yields; and ii) the uninspiring outlook for global steel. However, given that we have more than 100% upside we reiterate our Buy rating on the stock.
• Ezz Steel is back in the game on DRI cost advantage We estimate that Ezz Steel's DRI production costs are set to be cut by cUSD25-30/tonne on the back of the lower gas price. This, in our view, will ultimately lead to a wider cost advantage between DRI and scrap based production models, especially as iron ore to scrap spreads have been on average compressed by 35% Y-o-Y. Based on spot levels, we estimate DRI integrated plants in Egypt to enjoy cUSD50/tonne lower costs vs a scrap based model (see figure 3). Accordingly, we believe that Ezz Steel's operations should benefit from this advantage and see margins expand, especially as the group is now more exposed than ever to the DRI integration now that ERM's plant has come online.
• Local prices remain at considerable premium due to FX shortage We believe that prices in Egypt will continue to be resilient versus other regions globally due mainly to i) antidumping fees; as well as ii) the shortage in FX, which has hindered local importers from competing in the market. Currently, we estimate that prices being set in Egypt (cUSD550/tonne) imply substantial EGP devaluation. Hence, we believe that importers will not be able to compete with local producers, unless a devaluation takes place to clear the entire market.

Ahmed Hazem Maher