Earnings Report /
Egypt

Ezz Steel: 3Q19 – Losses widen and net burn rate dives

    Al Ahly Pharos Securities Brokerage
    2 January 2020

    ESRS attains gross losses earlier than expected 

    Ezz Steel (ESRS) reported 3Q19 consolidated revenue of EGP9,357mn, down 21.7% y/y and 29.6% q/q. The acute sequential decline is almost entirely driven by declining sales volume (-28.7% q/q) and was mainly driven by 37.2% q/q decline in long steel sales volume. The company attained a gross margin loss in 3Q19 of 3.0% on: 1) rising input costs namely iron ore; and 2) strengthening EGP which both affect margins and profitability negatively. Net losses widened to EGP1.9bn vs. EGP1.0bn in 2Q19 and EGP613mn in 3Q18. The company will miss our net loss estimate of EGP5.0bn by a mile and could easily surpass the EGP7.0bn mark after accounting for the recent price cuts in 4Q19, natural gas savings, and excluding the sizable capital gain that could arise from EFS and ERM sale transaction. 

    Considerably higher tariffs is the only way out

    While current local long steel prices are 3.7% below global prices, we do not believe that closing the gap will result in any margin improvement. We believe that performance will deteriorate further in 4Q19 on the back of EGP1,320/ton steel price cut that took place in 4Q19 and even after accounting for both natural gas savings of EGP290/ton and EGP204/ton reduction in iron ore prices. Accordingly, we expect the gross loss to widen further and net loss to cross the EGP7.0bn mark in FY19 excluding capital gains arising from the restructuring plan. We reiterate our views that the government should impose a considerably higher and flexible tariff scheme in the neighborhood of 50% – at the time of writing this - to protect local manufacturers from the global trade war.

    Net burn rate falls below 6 months; Underweight ESRS and EZDK 

    Based on 3Q19 figures, the company’s net burn rate is slightly less than 6 months. Net debt rose to EGP29.5bn vs 26.5bn in 2Q19. We believe that net debt will continue to rise and accordingly wipe out any savings resulting from interest rate cuts. We continue to advise our clients to offload positions in ESRS and EZDK.