Equity Analysis /
Egypt

Q1 19 Results: Brace for impact

    Mark Adeeb
    Mai Ayoub

    ESRS reports sizeable loss on deteriorating industry dynamics

    ESRS released Q1 19 consolidated indicators. Q1 19 revenue came in at EGP12,616mn, up 0.1% yoy and 7.7% qoq. Net loss widened to EGP1,275mn vs a net income of EGP184mn in Q1 18 and a net loss of EGP697mn in Q4 18. Looking ahead, we expect losses to widen on the back of 1) the court’s decision to cancel import tariffs on billets, 2) shrinking steel/iron ore spread (US$303 vs US$329 in Q1 19), 3) rising electricity tariff effective July 1, 2019, and 4) strengthening EGP against the US$.

    EZDK: Losses widen as margins dive

    EZDK reported Q4 18 consolidated revenue of EGP10,617mn, up 1.0% yoy and 2.8% qoq. The GPM dived to 2.4% versus 13.0% in Q1 18 and 7.5% in Q4 18. Margins declined on the back of 2.9% decline in average steel/iron ore spreads (US$329 vs US$339 in Q4 18). Attributable net loss came in at EGP321mn versus attributable net income of EGP713mn in Q1 18 and EGP229mn in Q4 18.

    Long-term tariffs could offer respite

    In light of worse-than-expected current market dynamics, we believe that both companies will miss our FY 19 estimates and remain in negative territory. While we rule out natural gas price reduction, we think the imposition of long term import tariffs on both semi-finished products and finished products could offer respite. Otherwise, the company will keep financing operations through raising additional debt, which we estimate to be north of the EGP28bn mark currently. We are currently in the process of revising our numbers to factor in current dynamics.

    Underweight on ESRS and Equalweight on EZDK

    Both companies will miss our estimates by a mile on deteriorating industry dynamics. Additionally, we expect EZDK to cut its dividend payout, which will have a negative impact on the other subsidiaries’ cash flows. In the meantime, we maintain our Equalweight recommendation  for EZDK and Underweight recommendation for ESRS.