EUR 21.27 For Business Accounts Only

Discount to global peers justified by subpar growth; Upgrade to Neutral

Raise TP by c8% to EGP974/share. This comes mainly on the back of the DCF roll-over. We upgrade our call to Neutral, given the c7% share price drop since our previous report, published in Mar-18. EZDK trades on a 2019e proportionate EV/EBITDA of 4.8x, a 7.8% discount to global peers. This is justified, in our view, by a proportionate 2019-21e EBITDA CAGR of -2.4% vs. +1.4% for global peers, as well as Egypt’s high capital costs and EZDK’s negative risk profile.

Inflationary pressures largely offset higher operating rating at EFS. We forecast the blended average operating rate to increase to 94% in 2019 and 97% in 2020, from 85% in 2017 (based on an integrated capacity of 4.3mn tpa), on the recent EGP2.3bn of fresh WC funding acquired in Oct-18. However, we expect this to be largely offset by inflationary pressures (mainly rising power costs), straining profitability. We see EBITDA rising only c11% in 2019 to EGP5.9bn and falling at a 2019-24e CAGR of 1.3%.

Cash flow pressures, hefty interest expenses to weigh on balance sheet. We expect EZDK to require EGP5bn of additional WC investments over 2019-24, mainly for the repayment of late dues at EFS (EGP3.4bn as of Jun-18). This, coupled with high interest rates, leaves limited scope for deleveraging. We estimate c74% of EZDK’s FCFF to be absorbed by interest payments over 2019-24, although we assume a 650bps interest rate cut over 2019-20.

Key risks. Global economic uncertainties and rising trade tensions pose the risk of a negative steel cycle. Alone, every 5% lower production and sales volume knocks 53% off our TP, and every 5% higher/lower-than-anticipated steel margins adds/reduces c17% to/from our TP. Otherwise, every 5% of higher/lower-than-expected USD:EGP adds/deducts 53% to/from our TP, all else constant.