Ezz Al Dekheila (IRAX) released its standalone 1Q18 financial highlights, showing a significant improvement in performance, with earnings coming in at EGP898mn, which is in line with our estimates of EGP892mn (+97% Y-o-Y, +26% Q-o-Q, +1% vs. EFGe). Revenues came in at an impressive EGP10.3bn during the quarter, which exceeded EFGe by c12%, likely on the back of higher-than-expected sales volume, which should have been inflated by toll manufactured volumes from the agreement with EFS. Operationally, while GPM standing at c16.6% is an impressive feat on its own. This strong set of results reinforces our view that DRI margins are still accretive even in a USD7/mmbtu gas price environment, which will likely be adopted across the group once working capital is made available. 
 
Despite a positive set of results from EZDK’s, we think Ezz Steel will likely still generate a loss in 2Q18, given the impact of the shutdown at the supplier of ERM’s industrial gases. Overall, the EZDK will be contributing cEGP493mn in earnings for ESRS, but ERM and ESR will still weigh down on the results in 2Q18, and we estimate losses may surpass cEGP100mn in 2Q18 for ESRS. With EZDK’s remarkable set of results, we think another dividend distribution of EGP40/share (similar to 1Q18) is not out of the question – especially as ESR is in need for dividends to be up-streamed.
 
There are a number of positive themes that may play out in the interest of both Ezz Steel and IRAX, which may be: i) interest rate cuts in Egypt, albeit likely to take longer than initially expected; ii) demand growth for steel in Egypt, which already expanded c18% Y-o-Y in 1H18; and iii) a potential play on cuts in gas prices post the energy deregulation. 
        In relation to IRAX’s valuations, it trades at an undemanding PE of only 4.5x in 2018 (vs. our implied valuation of c7x) and an EV of only cUSD380/t (a massive and unjustified discount to replacement cost). While attractively priced, IRAX’s liquidity continues to be lacking; hence, we prefer exposure to the name through ESRS. 
        As for ESRS, we think IRAX actually represents cEGP23/share (c88% of MCap). Accordingly, ESRS seems to be offering an abundance of its capacity (ESR,EFS, ERM) at negligible valuations. Today, ESRS trades at: i) a 2018 EV/EBITDA of only c5x, while offering c15% EBITDA CAGR (2018-20); as well as ii) an EV/t of cUSD435 (another massive and unjustified discount to replacement cost). 8-20); as well as ii) an EV/t of cUSD435 (another massive and unjustified discount to replacement cost). 

Al Ezz Al Dekhela: EGP1,038.96 as of 14 Aug. 2018, Rating: Buy, TP: EGP1,700.00/share, MCap: USD780mn, IRAX EY/IRAX.CA
 
Ezz Steel: EGP26.24 as of 14 Aug. 2018, Rating: Buy, TP: EGP36.00/share, MCap: USD799mn, ESRS EY/ESRS.CA