• 1Q16 in the red due to FX; reiterate Buy on undemanding valuation Ezz Steel reported its 1Q16 financial results with a net loss of EGP137mn, better than our estimate of a net loss of EGP271mn mainly as FX losses were less than we expected. Following the EGP devaluation that took place in March, we had estimated FX losses of EGP428mn. However, EFS booked a non-cash FX gain, which we had not accounted for. Despite the better-than-expected results, we continue to believe that a full recovery has been pushed back another year. That being said, the stock is trading at an undemanding valuation with a 2017e P/E of 6.9x; hence, we remain Buyers of Ezz Steel.
• Operational recovery not enough to turn Ezz profitable… Operationally, the company managed to generate relatively robust EBITDA margin at 10% in 1Q16 as: i) DRI integration is estimated to have come in at c75% at EZDK; ii) Egypt’s steel demand grew 26% Q-o-Q; and iii) EFS began to show signs of improvement as it booked minimal operating profit. Ezz Steel’s EBITDA came in at EGP498mn, in line with our expectation (-2%). However, this was not sufficient to turn Ezz Steel profitable given: i) a substantial FX debt exposure, which continues to be a risk to the bottom line (despite its ability to raise its prices in local currency terms); and ii) sub-optimal gas supply.
• … with local demand in 2Q weakening amid rising prices  In 1Q16, Egypt’s steel demand was exceptionally strong at c2mn tonnes (+26% Q-o-Q, flattish Y-o-Y), however, demand levels have softened in 2Q16 (-33% Q-o-Q) as the market continues to adjust to sudden price movements (be it in the global or local markets) and also due to seasonality impact (lower demand in Ramadan). Prices have shot up c18% Q-o-Q in 2Q16, which was predominantly a result of local producers passing on: i) March’s EGP devaluation; and ii) a hike in global prices (Turkish steel prices up c25% Q-o-Q). This sudden move in pricing led, in our view, to weaker local demand. However, we remain positive on the local demand story after the market absorbs the price increase. 

Ahmed Hazem Maher