Ezz Steel [ESRS.CA] has just reported its 3Q16 financial results showing losses of EGP188mn vs losses of EGP240mn in 2Q16 and losses of EGP172mn in 3Q15. We had noted earlier that EFS' recently announced loss making results and indicated that the group could remain in the red in 3Q16, which came as a disappointment to our initial estimates for Ezz Steel to reach breakeven on EZDK's stellar performance.   EZDK's elevated DRI integration level in 3Q16 flowed through well to the group's operating line and drove consolidated EBITDA to EGP582mn (+88% Q-o-Q, +276% Y-o-Y). This was also reflected in the EBITDA margin expanding to a 9.8% vs 7.7% in 2Q16 and only 4.4% in 3Q15. We think that the main catalysts behind EZDK's operational excellence were: i) higher volumes on robust demand in 3Q16 (+33% Q-o-Q, +13% Y-o-Y); ii) improved, EGP based, pricing environment (+6% Q-o-Q, +21% Y-o-Y); iii) the utilisation of low cost iron ore inventories; and, most importantly, iv) better availability of natural gas at the company's DRI plants. However, consolidated results were less than attractive as: i) ESR's scrap-based production model generated weaker-than-expected profitability on higher-than-expected raw material costs; and as ii) EFS's losses (cEGP224mn), which included an FX charge of EGP67mn, continued to weigh down on the group's profitability.   Forget 2016 and look ahead to 2017's likely recovery; Buy We think that 2016's loss has already been discounted by the market and does not pose any meaningful downside from here. We continue to reiterate our Buy rating on Ezz Steel today as 2017 seems to be gearing up to be the year when the company finally recovers to profitable levels. This improvement should be primarily driven by: i) gas supplies continuing to recover; ii) the full impact of ERM's new DRI plant positively affecting 2017's margins; and iii) the slow recovery in the international steel market. On valuation, the stock continues to offer upside and is trading at a steep discount (c58%) to EV/tonne multiples of peers as well as the recent transaction in the Egyptian steel market. Even post the stock's rally in recent weeks, Ezz Steel still trades at an undemanding 2017e P/E multiple of 9x while offering massive growth in consecutive years (as Egypt's gas story continues to feed through to margins). (company, Ahmed Hazem Maher)   Ezz Steel: EGP13.05 as of 14 December 2016, Rating: Buy, TP: EGP15.00 per share, MCap: USD380 million, ESRS EY / ESRS.CA