EFG-Hermes said in a report issued on Egypt’s steel manufacturer Ezz Steel that the stock continues to trade at an EV/tonne of USD571, which is significantly below its replacement cost of USD750/tonne.
“We believe that the market is assigning a hefty discount on the share price and is yet to fully price in the new DRI expansion, given curtailments in natural gas supply. However, we remain positive on the long term prospects of the company as the new DRI expansion should fuel margin expansion and create value to shareholders,” said EFG.
EFG raised its 2015 EPS by 58% as we incorporate the newly applied 200-day anti-dumping fees (7.3% or a minimum of EGP290/tonne) into our model, which it believes would trigger an increase in ex-factory prices and feed through to margins. Local steel demand has been relatively weak during 2014. Local production only saw a 3% growth Y-o-Y through to October, According to World Steel Association, while published figures by the Egyptian Ministry of Trade show that steel production has been flat Y-o-Y through to October at 6 million tonnes. Despite this, the outlook for steel remains positive with mega projects expected to support a 6% CAGR in steel demand and keep the market in a deficit state. This should also support a 4% CAGR in prices between 2014-17e, according to EFG.
Ezz Steel consolidated financial results for H1-14 had shown net loss of EGP 142.5 million, against EGP 621.6 million net profit in the year earlier period.
Meanwhile, standalone financial results for the same period mirrored EGP 41.3 million net profit, compared with EGP 45.4 million net profit in H1-13.
The steel producer had reported net profit of EGP 20.2 million for Q1, with a drop by 94% compared with EGP 371.6 million net profit in the same period a year earlier.