EFG Hermes initiated coverage on Ezz Steel with a Buy recommendation, setting the stock’s fair value at EGP 23, with 22% upside potential.
Ezz Steel is a leading steel producer, with c58% market share in Egypt and a combined capacity of 5.8mn tonnes/annum (mtpa) of long (3.5mtpa) and flat (2.3mtpa) products. Its 55%-owned Ezz Al Dekheila (EZDK) is the main source of cost advantage against local and imported rebar as it integrates a directly-reduced iron (DRI) production model into electric arc furnaces. The DRI/EAF model enjoys a cUSD60/tonne cost advantage against the scrap-based production one that is used by its main competitors, we estimate. Current oversupply in the global iron ore market should continue to favour DRI plays over scrap. Ezz plans to replicate EZDK’s DRI integrated model in other subsidiaries, which should improve margins significantly by 2015, according to EFG.
Ezz’s new DRI plant (1.85mtpa) should feed through c80% of production at EFS and ESR. The project is expected to start commercial operations in 1H2015, and it would fuel a 75% EBITDA CAGR in 2014-16e as it brings EFS’s and ESR’s low margins closer to EZDK. Egypt’s demand grew c10% Y-o-Y in 1H2014, according to World Steel. The sizeable infrastructure and residential projects planned in Egypt could support a 6% CAGR in demand over our forecast horizon. Downside risks to forecasts are: i) worse-than-expected gas supply disruptions, leading to higher scrap content and in turn, higher costs; and ii) a further rise in gas prices.
“The recent rise in Egypt’s natural gas price (USD7/mmBtu from USD4/mmBtu in 2013) should have increased DRI-based EZDK’s cash costs by cUSD35-40/tonne and Ezz Steel’s overall cost by cUSD20-25/tonne. Electricity prices have also increased 23%, which we estimate has led to a cUSD6/tonne increase in Ezz’s overall costs,” said EFG “Nevertheless, Ezz Steel still enjoys a cUSD35-40/tonne of cost advantage against imported rebar and local players, in our view. Our model suggests that the Ezz Steel’s DRI-model will remain favourable to scrap below a gas price of USD12/mmBtu.”
Ezz Steel is a leading steel producer, with c58% market share in Egypt and a combined capacity of 5.8mn tonnes/annum (mtpa) of long (3.5mtpa) and flat (2.3mtpa) products. Its 55%-owned Ezz Al Dekheila (EZDK) is the main source of cost advantage against local and imported rebar as it integrates a directly-reduced iron (DRI) production model into electric arc furnaces. The DRI/EAF model enjoys a cUSD60/tonne cost advantage against the scrap-based production one that is used by its main competitors, we estimate. Current oversupply in the global iron ore market should continue to favour DRI plays over scrap. Ezz plans to replicate EZDK’s DRI integrated model in other subsidiaries, which should improve margins significantly by 2015, according to EFG.
Ezz’s new DRI plant (1.85mtpa) should feed through c80% of production at EFS and ESR. The project is expected to start commercial operations in 1H2015, and it would fuel a 75% EBITDA CAGR in 2014-16e as it brings EFS’s and ESR’s low margins closer to EZDK. Egypt’s demand grew c10% Y-o-Y in 1H2014, according to World Steel. The sizeable infrastructure and residential projects planned in Egypt could support a 6% CAGR in demand over our forecast horizon. Downside risks to forecasts are: i) worse-than-expected gas supply disruptions, leading to higher scrap content and in turn, higher costs; and ii) a further rise in gas prices.
“The recent rise in Egypt’s natural gas price (USD7/mmBtu from USD4/mmBtu in 2013) should have increased DRI-based EZDK’s cash costs by cUSD35-40/tonne and Ezz Steel’s overall cost by cUSD20-25/tonne. Electricity prices have also increased 23%, which we estimate has led to a cUSD6/tonne increase in Ezz’s overall costs,” said EFG “Nevertheless, Ezz Steel still enjoys a cUSD35-40/tonne of cost advantage against imported rebar and local players, in our view. Our model suggests that the Ezz Steel’s DRI-model will remain favourable to scrap below a gas price of USD12/mmBtu.”
Source:
Mubasher
