Earnings Report /
Egypt

ESRS & IRAX 3Q21| Another strong quarter bolstered by robust prices

  • Another strong quarter bolstered by robust prices

  • Margins peaked already; GPM fate relies on pricing power and cost inflation

  • Net debt broadly stable; Current interest rates alleviate some pressure

Zeyad Ahmed
Al Ahly Pharos Securities Brokerage
16 November 2021

Another strong quarter bolstered by robust prices

Ezz Steel released a positive set of 3Q21 results further supporting FY21 profitability. ESRS achieved EGP897 million of attributable profits during the quarter versus EGP929 million of losses in 3Q20 and +12% QoQ. Net profit before minority interest was EGP1.36 billion versus net losses of EGP1.34 billion in 3Q20 and net profit of EGP1.21 billion in 2Q21. NPM came positive at 4.8% (+15.6pps YoY, Stable QoQ).

The results came in positive on strong steel prices (long and flat) coupled with strong volumes (despite declining by 1% QoQ, volumes were higher by 18% YoY). Exports were a key catalyst in the performance this year, as exports amounted to USD 1.014

billion, HRC’s share was USD822 million while wire rods (type of long products) exports were USD191 million. From a quarterly view, exports sales amounted to USD427 million, of which HRC sales contributed USD 346 million and Wire Rod sales USD81 million.

Ezz Steel's consolidated revenue recorded EGP18.6 billion (+116% YoY and 10% QoQ). This was driven by surging prices (avg. revenue/tonne +57% YoY and 5% QoQ). Volumes were down 1.3% QoQ but higher 18% YoY. Long steel volumes dropped by 4% YoY and 2% QoQ but flat steel volumes rallied by 79% YoY and were stable QoQ.

4Q21 Outlook: Ezz Steel has raised its rebar prices in October by 2.7% to EGP15,000/tonne (Including VAT). However, we believe that going forward prices would be pressured to decrease due to a slowdown in iron ore price (4Q21 QTD Avg. USD189/tonne, -21% vs 3Q21, -31% vs 2Q21), cancellation of import tariffs on rebars (17%) and billets (10%) which might urge smaller competitors to decrease prices, and a decrease in global rebar prices in most regions

Margins peaked already; GPM fate relies on pricing power and costs inflation

Gross profit recorded EGP3.5 billion (+1810% YoY, +1% QoQ) while GPM came in at 19.0% (+16.8pps YoY, -1.8pps QoQ). The slight squeeze in margins could be attributed to a 13% increase in raw materials costs reflecting the belated impact of 1H21 iron ore prices. Average COGS/tonne increased by 51% YoY and 14% QoQ to record EGP12,120/tonne while average cash COGS/tonne increased by 54% YoY and 15% QoQ to EGP11,841/tonne. The company has achieved robust margins during the quarter, but we think that it would be challenging to sustain this GPM level beyond 2021.

The company recorded a strong positive EBITDA of EGP3.1 billion versus LBITDA of EGP-437 million in 3Q20 and EBITDA of EGP2.5 billion in 2Q21. EBITDA margin came in at +16.7% (+17.7pps YoY, stable QoQ).

4Q21 would see solid performance despite margins being pressured by c.1-2% due to the recent natural gas hike (+USD1.25/MMBtu) enacted starting from November 2021 as we expect this increase to result in an annual increase in COGS of c. EGP1.0-1.2 billion. That is in addition to the recent alleviation of import tariffs, and the potential price declines.

Net debt broadly stable; Current interest rates alleviate some pressure

Net debt stabilized at EGP35.4 billion on September 30, 2021. Net Debt/Market Cap stands at 5.1x. The consecutive interest rate cuts enacted in mid-March 2020, at the end of September and mid-November 2020, accompanied by the CBE's low-cost financing initiatives for the industrial sector acted as a breather for the company and the rest of the group. The effective interest rate recorded 8.5% during the quarter versus 10.4% in 3Q20 and 9.5% in 2Q21.

EZDK Followed ESRS Profitability Path 

  • EZDK topline recorded EGP17.3 billion (+125% YoY and 17% QoQ) on the strong prices of the group

  • Gross profit recorded EGP3.2 billion (surging by 2,539% YoY and +0.6% QoQ), while GPM recorded 18.6% (+17.1pps YoY and -3.1pps QoQ)

  • The bottom-line recorded a net attributable profit of EGP1.17 billion up from EGP1.18 billion of losses in 3Q20 and EGP1.03 billion of profits in 2Q21. NPM recorded 6.7% (+22.0pps YoY and -0.2pps QoQ)

  • Net debt was stable QoQ at EGP30 billion on September 2021

ESRS is currently trading at annualized FY21P/E multiple of 2.04xand annualized FY21 EV/EBITDA of 4.09x, while IRAX is trading at an annualized FY21P/E multiple of 2.05x and annualized FY21 EV/EBITDA of 3.81x.