• Valuation gains attraction post EGP flotation; reiterate Buy We raise our fair value to EGP15/share (from EGP12/share) and our EPS estimates by c26% for 2017 and 2018. Our new FV is mainly a reflection of the weaker EGP, which should drive higher EGP earnings on the import parity nature of pricing. Despite this seemingly positive move, we note that our new fair value represents a 20% cut in USD terms as i) we raise our CoE to 23% (+150 bps); and ii) as we account for cEGP2.5bn in incremental debt from the translation of FX debt balances post devaluation. Despite this, we still think that Ezz Steel is trading at an unwarranted low P/E multiples of 7.6x and 4.9x in 2017e and 2018, respectively, vs. peers at 13.4x and 10.5x; hence, we reiterate our Buy rating on the stock.
• EGP floatation impact is a mixed bag; FX losses to weigh on 2016 The steel market should be one of the key sectors to be affected post the EGP float, in our view. For Ezz Steel, we think that there will be an initial negative impact from a massive FX loss of cEGP2.7bn during 4Q16 (assuming December ends at EGP16/USD). This non-cash loss should lead to an aggressive hit to Ezz Steel’s equity base, especially at EZDK, which holds the bulk of the FC debt. Nonetheless, consolidated equity (ex-minority) is expected to come in at EGP1.5bn. Looking ahead, we raise our 2017e EPS estimates by 22% on i) 47% Y-o-Y increase in steel prices (only 3% Y-o-Y in USD terms); and ii) DRI operating rates reaching 75% and 85% at ERM’s and EZDK, respectively.
• Expect a spike in debt servicing; but not alarming as margins expand With the flotation essentially raising the value of USD debt in EGP terms, we expect net debt balances to expand to cEGP18bn by end of 2016. This, along with the recent 300 bps rate hike, should push debt servicing charges higher in 2017 at an estimated EGP2.1bn. Yet, we see no cause for alarm, as operating profits are expected to grow by 2.9x to reach EGP4bn. Accordingly, we expect Ezz Steel’s interest coverage ratio to come in at a healthy 1.9x in 2017. On top of this, we also think that any decision to cut gas prices to USD4.5/mmbtu would support further margin expansion.

Ahmed Hazem Maher