• Revision of gas supplies and pricing drives a cut in FV; maintain Buy We cut our FV for Ezz Steel 14% to EGP12.0/share, as the government seems to have reverted from a decision to cut gas price to USD4.5/mmbtu and has, so far, maintained the USD7/mmbtu price level. In addition to the change of heart on gas price cuts, availability of natural gas has not met the levels we had anticipated initially for 2016; hence, we opt to reduce our DRI integration estimates to 46% at ERM’s new plant and 68% at EZDK from 75%. We also raise our CoE by 100 bps to reflect a higher risk free rate. Nonetheless, we remain Buyers of the stock as it currently trades at a 2017e P/E ratio of 6.9x vs. global peers at 17x and our implied multiple of 10x. Key risks include gas pricing (given government’s hesitation in setting prices) and availability.
• Time and time again: Recovery is pushed ahead for another year Despite the positive factors that are playing out in the market, such as: i) an improvement in the global steel price scene (Turkish Rebar is up 26% YTD); and ii) an expansion in the iron ore/scrap spread (+35% YTD), the full force of a recovery in Ezz Steel’s earnings seems to be pushed ahead for another year as gas pricing and availability continue to stand in the way. Our new revised estimates imply the company would continue to be loss-making in 2016, especially as FX losses are expected to play a major role (we maintain our previous FX loss estimate for 1Q16 at EGP428mn), and that 2017 would be the first year with profits since as back as 2013.
• Local demand and pricing remain solid With respect to the local market, prices have been quick to adjust to the movements in the FX rate in Egypt, as well as the improvement in the global steel dynamics and, in effect, remained at parity levels to imports. Local prices have, so far, risen 12% YTD in EGP terms, but have been flat YTD on a USD basis. As for demand, total steel sales in Egypt during 1Q16 came in at a healthy 2.0mn tonnes, reflecting 26% Q-o-Q improvement. This level is likely to ease off in the coming month as construction activity in Ramadan typically softens and picks up at a later stage.

Ahmed Hazem Maher