EUR 63.80 For Business Accounts Only

Upgrade to Neutral on valuation; Global steel cycle a key watch factor

Raise TP by 5.5% to EGP19.0/share on DCF roll-over. We upgrade our rating to Neutral, following the 25.7% share price drop since our last note, published in Mar-18. Ezz Steel trades on a 2019e proportionate EV/EBITDA of 5.8x, dropping to 5.2x in 2020e, in line with global peers, which we find justified, given Egypt’s high capital costs, and Ezz Steel’s 2019-21e EBITDA CAGR of 7.1%, above the peers average of 1.4%.

WC spending means deleveraging is a long-term story. We estimate WC spending in 2018 at cEGP6bn, and expect another cEGP7bn to be spent over 2019-24e, mainly to reduce payables pile-up (vs. our previous assumption of EGP13bn over 2018-19). Cash flow pressures mean deleveraging will be gradual and long-term. We estimate the net debt to rise to EGP25bn in 2018 from cEGP19bn in 2017, falling gradually to cEGP21bn in 2024.

Profitability squeezed by heavy leverage, inflationary pressures. We cut our EBITDA forecasts c7%, mainly reflecting c20% lower volume assumptions (from rolling capacity which generates a feeble EBITDA margin of 4-6% vs. 12-16% for integrated capacity). Despite our positive macro outlook, we expect interest expenses (EGP4.6bn in 2019e, falling to EGP2.4bn in 2024e) and inflationary pressures (mainly rising power costs) to keep the company pressured over at least 2019-20e. We expect Ezz Steel to be marginally profitable in 2019, gradually improving profitability beyond 2019, when Egypt’s high interest rates see a notable drop. The planned antidumping extension should offer no further pricing support, in our view.

TP highly sensitive to global commodities, FX, and gas price assumptions. Global trade tensions pose the risk of a negative global steel cycle. Alone, every 5% of lower/higher-than-expected steel margins reduces/increases our TP by c24%, and every 5% of lower-than-expected sales volume reduces our TP by 40%. Otherwise, every 5% of lower/higher-than-expected USD:EGP or every USD1/mmBtu lower/higher gas price than our USD7.0/mmBtu forecast adds/deducts 63% to/from our TP, all else constant.