Equity Analysis /
Egypt

Ezz Steel: 2Q19 – Steel companies to dodge severe price cuts on new tariff

    Mark Adeeb
    Mai Ayoub
    Al Ahly Pharos Securities Brokerage
    13 October 2019

    Volumes and margins recover sequentially

    ESRS reported 2Q19 consolidated revenue of EGP13,285mn, up 3.1% y/y and 5.3% q/q. Topline improved sequentially on the back of 17.1% growth in long sales reaching 1.07mn tons whereas flat steel sales volume declined to 232k tons, down 27.0% q/q. Average retail prices rose 0.7% q/q and declined 5.7% y/y. The GPM improved sequentially to 3.8% vs 2.4% on the back of the imposition of temporary anti dumping tariffs on finished steel imports (25%) and billets (15%).

    New tariff almost closes the gap between local and global prices

    The government imposed long term tariffs on long steel imports of 25% (min USD125/ton) until April 11, 2020, 21% (min USD105/ton) until April 11, 2021, and 17% (min USD85/ton) until April 11, 2022 which implies an effective tariff of 31% based on current global prices of USD407/ton. This brings the gap between local and global prices down to a premium of roughly 4.2% which is within the normal range historically. The government has also imposed a declining tariff on billets of 16% (min USD74) and declines to 10% (min USD46/ton) in April 2021. 

    ESRS to report weaker results in 2H19

    In our view, the current tariff will only provide protection against severe price cuts going forward but doesn’t provide room for price hikes. We expect the impact of natural gas prices reductions (USD1.5/mmbtu) and recent price cuts of EGP868/ton ex-VAT for long steel to be felt in 4Q19 which could possibly result in reporting gross loss and reduce gross profit by roughly EGP2,300/annum. We expect FY19 losses to reach c. EGP5.0bn.

    North of 50% needed for margins to recover

    We reiterate our views that the tariff should be north of 50% to allow fully integrated producers to report healthy margins in the range of 10% in terms of GPM. It is worth noting that the steel/iron ore spread declined to USD282 in 3Q19 vs USD302 in 2Q19 and USD325 in 1Q19.

    Underweight ESRS and EZDK 

    We continue to advise our clients to offload positions in both names on exceptionally challenging local and global market conditions. Both companies will miss our FY19 estimates. We are currently in the process of updating our figures to account for the current local and global market dynamics and the new ownership structure of both companies.