• What lies ahead? expect healthier operations; reiterate Buy We expect EZZ Steel’s operational results will continue to improve as the market has begun to turn for the better. The gas price cut to USD4.5/mmbtu (from USD7/mmbtu) bodes well for DRI integrated players such as Ezz Steel and should widen its cost advantage versus marginal scrap-based producers locally and in Turkey (see Fig 6). This should translate into healthier margins, in our view. The better availability of methane should also support its DRI integration (c75% in 2016), especially after ERM's new DRI plant is now online and will drive a spike in production at EFS. These factors combined bode well, and we expect it to be profitable in 2016. Ezz Steel is trading at a P/E of 11x for 2016e and 4.7x for 2017e and thus we reiterate our Buy rating.
• But be wary of FX losses as likely to heavily weigh on 1Q earnings The shortage of FX in Egypt has led Ezz Steel to be exposed to considerable levels of FX debt to finance raw material purchases. As such we expect EGP428 million FX losses in 1Q2016 and thus we have cut our 2016 EPS estimate by 41%. Positively, as long as FX is scarce, pushing imported competition aside, local steel prices should instantly adjust to post devaluation and maintain premium pricing versus global exporters (Turkey and China). We have already seen this price trend as Ezz Steel raised its April prices by EGP380/tonne (USD45/tonne), but also included a EGP200/tonne special discount, which raises the effective price by only EGP180/tonne initially. Despite our expectation for better operational results, we expect it to report a loss in 1Q16 on FX losses.
• 4Q15 results show promise as the turnaround commences 4Q15 earnings bounced back into the black at EGP91 mn after nine consecutive quarters of losses. While earnings were boosted by EGP118 million due to a revision of EFS' contracts for industrial gases, excl. one offs, losses would have been EGP26 mn. This was mainly due to operational gains, as its gross margin improved substantially to 13.5% (vs 4.4% in 3Q15) and this trend looks likely to continue in 2016.

Ahmed Hazem Maher