Ezz Steel (FV: EGP18, Underweight) and Al Ezz Dekheila (FV: EGP1,000, Equalweight)
- 1H19 performance will deteriorate further on rising iron ore prices.
- Margins will decline in 1H19 in tandem with global commodity price movements.
- Based on cost structure developments, the company has the flexibility to change the DRI-Scrap mix.
- If natural gas prices were to be subsidized and all DRI plants ran at full utilization rate, the total estimated savings would be cUSD150 mn. We have previously ruled out that the government would reduce natural gas prices and we also noted that imposing an import tariff would better shield all local manufacturers.
Challenging market dynamics weigh on cement sector’s performance
- Total sector demand likely to hover around 50-51mn tons in FY19.
- Sector dynamics remain exceptionally challenging and could possibly lead to more shutdowns.
- Margins are likely to remain extremely low given the current nameplate capacity/demand gap (roughly 35mn tons).
- Excluding capital gains and other unusual items, most players are likely to remain in negative territory throughout FY19.
Arabian Cement (FV: EGP7.87, Overweight)
- Management guided for no meaningful margin recovery unless the sector utilization rate reaches 85-90%.
- The company is currently focused on efficiency as evident by its investment in renewables to provide 4% of its electricity consumption.
- ACC aims to operate towards the lower end of the cash cost curve to minimize the impact of negative developments on future cash flows.
- Electricity tariff is based on the extra high voltage tariff, which should result in a smaller amount increase in electricity cost compared to other cement players.
Suez Cement (FV: EGP31.23, Overweight)
- The company is currently focused on divestiture of non-core assets. The company has earlier divested its 0.3mtpa white cement plant in Minya for roughly EGP700mn. The company received EGP230mn last year and received the rest in 1Q19.
- Suez Cement plans to either monetize Tourah’s land plot or consider other alternatives to unlock the land value.
- The company is currently focused on improving efficiency across its cement plants.
- Suez Cement reduced the number of employees from 3,600 in 2016 to 1,700 currently.
- The energy mix is currently 70-80%, 20% AF, and 2-3% HFO to heat the kilns post maintenance shutdowns.