ESR/ERM and EFS losses expand in 2Q18
ESRS reported 2Q18 revenue of EGP12,885mn, up 31% and 2% q/q. While EZDK’s standalone GPM expanded to 16.6% versus 14.8% in 1Q18, ESRS’s GPM slightly decline to 13.4% versus 14.0% in 1Q18 on DRI longer than expected shutdown in 2Q18. Attributable net loss came in at EGP322mn versus a net loss of EGP67mn in 1Q18 and EGP550mn in 2Q17.
Longer than expected scheduled DRI shutdown weighs negatively on EFS and ESR/ERM performance
Due to technical issues related to ERM’s industrial gas supplier, the facility’s scheduled shutdown lasted for six weeks, which resulted in significant losses incurred by ESR/ERM and EFS. On a more positive note, management noted that 2H18 maintenance is 90% complete.
ESR/ERM performance to improve in 2H18
We expect ESR/ERM to at least break even in 2H18 post the completion of the DRI facility maintenance. We expect ESRS to meet our attributable net income FY18e of EGP241mn, driven by improving operations across ESR/ERM and EZDK performance.
Local prices to decline further in tandem with global prices
We expect local steel prices to decline by an additional 3% in 2H18 in tandem with the decline in global steel prices. Accordingly, we expect EZDK’s margins to slightly soften in 2H18, taking into account the recent hike in electricity tariff.
OW EZDK; UW ESRS
We prefer EZDK at the current prices. While we expect ESRS’s performance to improve in 2H18, we believe that EZDK will outperform ESRS driven by 1) stellar operations as EZDK reported standalone net income of EGP1,611mn in 1H18 coupled with 2) generous dividend payments, rendering EZDK as one of the highest dividend paying companies.