Net loss – EGP240mn, vs. loss of EGP201mn in 2Q15, loss of EGP137mn in 1Q16, EFG net loss estimate of EGP153mn EBITDA– EGP310mn, +91% Y-o-Y, -38% Q-o-Q, +7% vs. EFGe Revenue– EGP4.0bn, -10% Y-o-Y, -19% Q-o-Q, -20% vs. EFGe   Ezz Steel has just reported its 2Q16 financial results, showing net loss of EGP240mn, well below our expectation of a net loss of EGP153mn, mainly as we had not accounted for FX loss. The primary driver behind the weaker results, in our view, has been: i) Ezz Steel's strategic initiative to reduce FX debt balances that led to EGP187mn in FX loss; and ii) a 13% increase in net interest expense on the back of the recent hikes in interest rates. Although the move to reduce FX debt exposure has led to a large FX loss in 2Q16, it could turn out to be beneficial if a substantial move on official FX rate takes place in the near future, in our view. Operationally, revenue was affected negatively (-10% Y-o-Y, -19% Q-o-Q) by the weakened demand levels witnessed in 2Q16 (-25% Y-o-Y, -33% Q-o-Q), which were driven primarily by: i) low seasonal sales during the month of Ramadan; as well as ii) market participants adjusting to sudden price movements locally and globally early in 2Q. Gross margin, however, was relatively robust at 8.2% (vs. 3.6% in 2Q15 and 9.8% in 1Q16), as weak steel volumes (-20% Y-o-Y, -19% Q-o-Q) coincided with: i) relatively flat gas supplies at c70%; and ii) a draw-down on low cost iron ore raw material inventory, a portion of which was likely bought at historic low price of USD40/tonne. While revenue missed our estimate (-19% vs. EFGe), the healthy margin steered both gross profit and EBITDA back in line with our estimates (-4% and +7% respectively vs. EFGe).      Buy on undemanding valuation; possible earnings recovery not priced in: Ezz Steel continues to be trading at cheap multiples in 2017e, P/E of 6.1x and EV/EBITDA of 5.3x, way below global steel peers; hence, we remain Buyers. We believe depressed trading levels are not pricing in possible significant earnings recovery once the market turns more positive in Egypt and globally on: i) improved gas supplies in Egypt; ii) an improvement in the cost and the availability of sourcing FX; as well as iii) the move up from the trough cycle faced across the steel industry. Although 2Q16 results were quite poor, we see some positive operational developments as margins seem resilient and as we see less balance sheet risk post reduction in FX debt exposure.     While we do not give it much weight, in view of previous hesitation by the government, an upside to earnings could materialise if a decision is taken to cut gas price for the steel industry from USD7/mmbtu to USD4.5/mmbtu. This cut would likely result in cost savings of USD25/tonne, which would go straight to margins, in our view. (Earnings release, Ahmed Hazem Maher)   Ezz Steel: EGP7.14 as of 28 September 2016, Rating: Buy, FV: EGP12.00 per share, MCap: USD437mn, ESRS EY / ESRS.CA