Ezz Steel could remain in red for several years, likely to use CBE initiative for new financing facility
2020–23e EBITDA estimates cut by about 22% and TP by about 37%according to HC
The global steel market has recently emerged from a difficult 2019 as several factors affected trade, according to Mariam Ramadan, Head of Industrials at HC Securities and Investments. These factors included trade wars, weak economies and an ailing automotive sector.
Prices and margins edged higher in the first couple of months of the current year, before the coronavirus (COVID-19) 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 defence for governments, and in many cases were only demand-driven, implying production downtimes have been outweighed by demand destruction,” Ramadan said. “This has sent finished steel prices lower, including Turkey’s rebar at 8% lower in the year-to-date (y-t-d), whereas iron ore prices bucked the trend on continued price-supportive supply issues in Brazil and Australia, at only 4% lower y-t-d.”
Ramadan added that caution says recovery may not be V-shaped when the pandemic resolves, with the majority of economists and industry players seeing it last into 2021.
“Egypt being Ezz Steel’s anchor market is a positive but government measures alone are insufficient,” Ramadan added, “Egypt has so far been holding up relatively well, with the construction sector specifically enjoying business as usual, at least for existing projects.”
Ramadan attributed this to the government counting on this sector as an economic driver during this period. This is evident in the currently slightly higher consumption volumes y-o-y in the first quarter (Q1) of 2020.
This, coupled with energy price cuts and the extension to higher protective tariffs, have given the local steel sector a breather, besides the accelerated easing cycle.
Ezz Steel could benefit from the EGP100bn CBE initiative as it talks over a new financing facility. There is little concern over the steel licences offering which was an anomaly on the government’s part, as HC Securities and Investments believe it will be of no interest to investors in the current economics.
She added that there will be no addition to finished steel capacity, 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 of about 18%, on average, as the private sector takes a back seat in the near- to medium-term, and export markets remain muted with a roughly 35% decline in Q1 of 2020 y-o-y,” Ramadan added.
Parliament’s recent decision to impose a 10% development fee on finished steel imports is good news for the company, Ramadan added, as it raises the price ceiling for local rebar sales. This is despite actual prices having lately been linked more to billet imports.
It has also, more importantly, been positive for hot rolled coil (HRC) steel sales volumes and prices, following the recent surge of imported material and the failure of producers to lobby for protective tariffs, Ramadan said.