Equity Analysis /
Egypt

Al Ezz Dekheila Steel: North of 50% tariff needed to protect local producers

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

    Margins slightly recover sequentially on anti-dumping tariffs

    EZDK reported Q2 19 consolidated revenue of EGP11,128mn, up 3.3% yoy and 4.8% qoq. Topline rose on the back of 0.7% increase in average selling prices from the imposition of temporary anti-dumping tariffs on finished steel imports and billets in April. Accordingly, the GPM slightly recovered to 3.0% vs 2.4% in Q1 19 and 14.2% in Q2 18. Attributable net loss came in at EGP250mn vs EGP321mn in Q1 19 and attributable net income of EGP703mn.

    Margins to decline further in Q4 19 despite natural gas reductions

    Looking ahead, we expect margins to decline further in light of 1) the recent cuts in steel prices announced by the company (EGP990/ton for long steel) in October, 2) the existence of 34% local price premium to global steel prices in the market, which is partially explained by the import tariff and market uncertainty. We believe that the magnitude of price cuts outweigh the natural gas savings.

    Hefty tariffs is the only way out

    We strongly believe that the government should impose a hefty tariff on finished steel imports to protect local producers from the global trade wars. We reiterate our view that the government should impose a flexible tariff scheme that follows global prices and in light of current global dynamics and local cost structure, it should be north of 50% to manoeuver current global market conditions. 

    Underweight on ESRS and EZDK 

    We advise our clients to offload positions in both names on exceptionally challenging local and global market conditions. Both companies will miss our FY 19 estimates. We are currently in the process of reviewing our figures to account for the current local and global market dynamics, and the new ownership structure of both companies