Equity Analysis /

Ezz Steel: Margins fell on declining steel prices; U-shaped performance in FY19

    Mark Adeeb
    Mai Ayoub

    Net income in negative territory as expected 

    ESRS reported 4Q18 revenue of EGP11,715mn, down 5.4% y/y and 2.0% q/q. On a quarterly basis, revenues declined on the back of 1.6% decline in local selling prices. The GPM fell to 8.0% versus 14.1% in 4Q17 and 9.7% in 3Q18. Attributable net loss came in at EGP638mn versus EGP194mn in 4Q17 and EGP615mn in 3Q18.

    Margins to gradually recover beyond 1H19

    Despite the imposition of import tariffs of 25% on finished steel imports and 15% on semi finished products, steel prices only rose by EGP157/ton and we expect prices to rise by roughly EGP780/ton. That said, we expect margins to deteriorate in 1H19 and recover gradually afterwards since the price hikes will not be fully reflected in 1H19. It is worth noting that the recent increase in iron ore prices (USD14/ton) will likely be offset by declining pelletization cost. On a blended basis, the GPM should rise to 10-12%, thanks to the imposition of import tariffs and after taking into account 20% hike in electricity tariff. 

    ESRS likely to miss our FY19 estimates

    Given 1) the strengthening EGP against the USD, 2) rising raw material prices namely iron ore and electricity tariff, 3) lower-than-expected global steel prices, ESRS will likely miss our FY19 estimates for GPM of 15.4%, EBITDA of EGP7.6bn, and attributable net income of EGP1.1bn. In our view, the company needs to raise prices by roughly EGP730/ton to breakeven, assuming no further squeezes in steel/iron ore spread (USD355). 

    Maintain Underweight; Financial position key risk

    In light of current global dynamics, we believe that our FY19 estimates are far-fetched. It is worth noting that the company’s net debt excluding capital leases rose to EGP24.7bn and given delayed interest rate cuts, we expect debt servicing to weigh on performance.