May 7, 2020

Global steel market takes another hit after the coronavirus outbreak and oil slump

Norway
  • Global steel market takes another hit, braking its preliminary recovery from a bad 2019, with the local market dynamics providing a breather

  • Ezz Steel could remain in the red for another couple of years and is likely to call on the CBE initiative for a new financing facility

  • We cut our 2020–23e EBITDA estimates c22% and our TP c37% to EGP7.5/share and reiterate our Neutral rating

In its latest reports, HC Brokerage shed the light on the steel industry in Egypt in light of the global condition stating that “Global steel market takes another hit; recovery unlikely before 2021”

Mariam Ramadan, the Head of Industrials at HC commented that “The global steel market had recently emerged from a difficult 2019 (during which the industry wrestled with trade wars, weak economies and an ailing automotive sector), with prices and margins edging higher in the first couple of months, before the coronavirus outbreak and oil slump posed a risk to its nascent recovery. In the wake of the pandemic, plant closures have been the last line of defense for governments, and in many cases were only demand-driven, implying production downtimes have been outweighed by demand destruction, which sent finished steel prices lower (Turkey rebar 8% lower y-t-d), whereas iron ore prices bucked the trend on continued price-supportive supply issues in Brazil and Australia (only 4% lower y-t-d). The caveat is that recovery may not be V-shaped when the pandemic resolves, with the better half of economists and industry players seeing it lasting into 2021.”

Egypt being Ezz Steel’s anchor market is a positive but government measures alone are insufficient: Egypt has so far been holding up relatively well, with the construction sector specifically enjoying business as usual, at least for existing projects, as the government bets on it to drive the economy at this time, and which is evident in current volumes (1Q20 local consumption slightly higher y-o-y). This, coupled with the cuts to energy prices and the extension of higher protective tariffs gave a breather to the sector locally, besides the accelerated easing cycle. Ezz Steel could also benefit from the EGP100bn CBE initiative as it talks over a new financing facility. The steel licenses offering was an anomaly on the government’s part, but we are not concerned as we believe it will be of no interest to investors at current economics, and will result in no addition to finished steel capacity, only backward integration if anything for a couple of rerollers. While the government seems more inclined to ease restrictions going forward than head into a full lockdown, we still opt to cut our total sales volume forecasts c18%, on average, as the private sector takes a back seat in the near/medium term and export markets remain muted (1Q20 exports down c35% y-o-y).” , Ramadan added.

The Head of Industrials at HC carried on “Reiterate Neutral: Along with a c5% cut to our EGP/USD estimates, this filters through to a c22% downward revision to our 2020—23e EBITDA forecasts, and we now expect the company to remain in the red a couple more years before turning around in 2023. We also now account for Ezz Steel’s stake in EZDK at 64%, with the ownership unlikely to be effected before 2H20 when the legal procedures complete. The transfer of EFS and ERM has nevertheless taken effect in 4Q19 against a credit balance on EZDK’s balance sheet. This translates to a c37% cut to our TP to EGP7.5/share, which puts the company on a 2021e EV/EBITDA multiple of 8.4x (trading at 8.8x), and implies a potential return of 3.0% on the 30 April closing price of EGP7.3/share, and we hence reiterate our Neutral rating. Our TP excludes the proportionate addition of some EGP1.6bn owed to ESR from EZDK post the latter’s capital increase, which translates to EGP1.1/share in today’s terms, that it is likely however to remain an open balance between the two against future DRI supplies for instance than be settled in cash. In our view, current valuation is not compelling, with the stock trading comfortably above its peers’ implied and historical 12M forward EV/EBITDA multiple.”

“It is worth mentioning that The Egyptian Parliament’s recent decision to impose a 10% development fee on finished steel imports is good news for the company as it raises the price ceiling for local rebar sales (though actual prices have lately been more linked to billet imports), but is more importantly positive for HRC sales volumes and/or prices, following the recent surge of imported material and the failure of producers to lobby for protective tariffs.”, Mariam Ramadan concluded.