EZZ STEEL

The Way is Currently Paved

Recommendation Reuters Code Bloomberg Code Stock Performance (52 Weeks)

BUY ESRS.CA ESRS EY 35.00
ESRS Vol. (mn,RHS) ESRS EGX30
8,000

Fair Value Market Capital (Bn) 30.00

7,000

EGP37.5 EGP16.2 6,000

25.00

Current Price 52Weeks High/Low 5,000

20.00

EGP29.9 EGP16.0-30.8 4,000

15.00

Upside 1-M Av. Daily Turnover (Mn) 3,000

10.00
25% EGP71.2 2,000

5.00
Sector No. of Ordinary Shares
1,000

Building Materials 543,265,027

0.00 0

As of April 23, 2018 Source: Sigma Capital Website

ΣΣ We update our fair value for Ezz Steel (ESRS) to EGP 37.46/share which
implies a BUY recommendation from 23rd of April 2018’s closing price Financial Indicators FY17a FY18f FY19f FY20f
of EGP 29.85/share, which is driven from an upside potential of 25%. We Revenue (EGP Mn) 41,742 53,902 58,578 64,339
used Sum of The Parts (SoTP) valuation method to value ESRS as we see
it as the most proper methodology to reflect ESRS’ subsidiaries different EBITDA Margin 10.36% 9.46% 8.53% 8.15%
structures. We valued Al Ezz Dekhila “EZDK”, Ezz Flat Steel “EFS” and EPS -2.91 -0.67 -0.06 0.76
Ezz Steel Rebar “ESR”/Ezz Rolling Mills “ERM” on standalone basis, and
then we consolidated the equity value of each company using ESRS’ RoA -3.40% -0.75% -0.06% 0.73%
proportionate investment in each.
RoE -14.18% -3.29% -0.29% 3.10%
WC shortage to be overpassed P/E NA NA NA 38.93
ΣΣ ESRS is set to secure most or all of its needed working capital funding
P/BV 1.83 1.78 1.73 1.52
within two years, capitalizing on the recent settlement between Ahmed
Ezz and the government (which eliminates the company’s political risk), in EV/EBITDA 9.10 8.05 8.24 7.29
addition to the positive sentiment emerged towards the group after IRAX
FY17 historical profits. The secured funding is to be injected to both ERM’s DPS - - - -
DRI and EFS plants, which is part of ESRS’ ambitious plan to reach a fully Note: Multiples are based on a market price of EGP29.40/share
DRI integrated group. Source: Sigma Research

Anti dumping fees paved the way for margins control and
market share expansion Shareholder Structure
ΣΣ The imposition of the anti dumping fees last July granted local
manufacturers a competitive edge vs. finished steel importers and allowed
local manufacturers to pass their higher costs to the end consumer. On the
other hand, local steel manufacturers ceased imported steel’s lost market Free Float, 26%
share through expanding their local sales even at the expense of exports
Ezz Group, 38%
volume, as EFS did, to capitalize on better local margins.

Subsidiaries status; IRAX to keep flourishing, new DRI profits

will boost ERM’s and a looming turnaround in EFS, operationally
ΣΣ IRAX is expected to preserve its position at the top of Egypt’s steel Others, 15%

producers bolstered by its economical DRI method in production which

gives it a USD +100/ton cost advantage vs. local peers. As for ERM’s DRI
plant, it will see a significant improvement in its production starting FY18 HSBC Bank Plc, 9%
Egyptian Int. Trade
Investments, 11%
with the availability of WC financing as mentioned earlier. This is expected
to improve ERM’s profitability as the delineated plan is to sell DRI to EFS at
prices near global scrap prices. In the meanwhile, EFS is finally approaching Source: Company disclosure
its long awaited turnaround (at the operational level) as ERM ramps up
productivity in its DRI plant to provide raw materials for EFS.

Mohamed Magdi
mohamed.magdi@sigma-capital.com

SIGMA Research
 EZZ STEEL April 24, 2018

Valuation
We upgrade our fair value for Ezz Steel (ESRS) to EGP 37.46/share which implies a BUY recommendation from 23rd of April 2018 closing price of
EGP 29.85/share driven from an upside potential of 25%. We used Sum of The Parts (SoTP) valuation method (valuing Al Ezz Dekhila “EZDK”, Ezz
Flat Steel “EFS” and Ezz Steel Rebar “ESR”/Ezz Rolling Mills “ERM” on standalone basis) to mirror the distinct production lines, cost and financing
structures for each company of ESRS’ four subsidiaries, in a thorough way.
ESRS is trading at a P/B of 1.81x vs. regional peers’ of 1.71x. Meanwhile, Egyptian Steel Company’s new project in Ain Sokhna inaugurated last
December with an investment cost of EGP 5.5bn and a long steel production capacity of 530k ton/annum, according to media sources, which
implies an EV/ton of USD 589. Ezz Steel is trading at an EV/ton of USD 384 which signals a 35% discount to that of Egyptian Steel.

Al Ezz Dekhila (IRAX) “EZDK”

EZDK is the only company of ESRS’ subsidiaries that is listed on the Egyptian Exchange Market (EGX) under the ticker (IRAX). We reached an equity
value of EGP 21,231mn (ESRS stake is 55%) which implies a fair value of EGP 1,589/share, signaling a BUY recommendation that is driven from a
35% upside potential over the stock’s closing price of EGP 1,176/share at 23rd of April 2018. Using DCF valuation method, we utilized an average
WACC of 13.52% over our 5Yr forecast horizon driven from; (1) an adjusted beta of 0.63, (2) a terminal growth rate of 3%, (3) a declining risk-free
rate with an average 5Yr of 11.08% (post tax), (4) and a declining cost of debt at a 5Yr average of 6.36% post tax. The squeezed cost of debt is
attributed to the fact that +50% of IRAX loans are in foreign currency, in addition to the anticipated cuts in local interest rates.
IRAX is trading at a P/E of 7.23x, with a discount of 46% to its regional peers’ P/E of 13.5x; while it has a P/B of 3.78x vs. 1.73x for regional peers.
IRAX’ EV/ton comes at USD 504 which is at a discount of 15% to that of Egyptian Steel Company, as shown above.

Ezz Flat Steel “EFS”

Our DCF valuation model for EFS yielded an equity value of EGP 4,366mn (ESRS direct stake is 47%), where we utilized an average WACC of
12.12% through our 5Yr forecast period. Our used WACC was driven from; (1) a beta of 1.2, (2) a terminal growth rate of 3%, (3) a declining risk-
free rate with an average 5Yr of 11.08% (post tax), (4) and a declining cost of debt at a 5Yr average of 7.34% post tax. Similar to sister IRAX, EFS’
majority of debt is denominated in foreign currency, which in turn squeezed its cost of debt.

Ezz Steel Rebar “ESR”/Ezz Rolling Mills “ERM”

Our DCF valuation model for ESR/ERM yielded an equity value of EGP 6,697mn (ESRS direct stake is 100%) where we utilized an average WACC
of 12.32% through our 5Yr forecast period. Our used WACC was driven from; (1) a beta of 1.2, (2) a terminal growth rate of 3%, (3) a declining
risk-free rate with an average 5Yr of 11.08% (post tax), (4) and a declining cost of debt at a 5Yr average of 10.15% post tax.

Company Estimated Equity Value ESRS’ Holding Stake Contribution to ESRS’(EGP

(EGP mn) mn)

Al Ezz Dekhila 21,231 55% 11,590

Ezz Steel Rebars/Ezz Rolling Mills 6,697 100% 6,697

Ezz Flat Steel 4,366 47% 2,054

Equity Value 20,342

No. of Shares 543

Fair Value (EGP/share) 37.46

Contribution to Fair Value

10%

33%
57%

Al Ezz Dekhila Ezz Steel Rebar/Ezz Rolling Mills Ezz Flat Steel

Source: SIGMA Research

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 EZZ STEEL April 24, 2018

Upside Risks:
1. Covering the shortage in working capital faster than expected, leading to higher utilization rates.
2. Higher than anticipated steel selling price bodes well to ESRS in general, and to IRAX specifically.
3. Higher interest rate cuts than our expectations, as we see a rate cut of 400bps during FY18 of which 200bps already took place.
4. Lower NG prices than the current USD 7/mmbtu will widen DRI’s cost advantage.

Downside Risks:
1. Slashing the anti-dumping fees imposed on Turkish, Chinese and Ukrainian steel imports, will be a major drawback to our fair value.
2. A drop in natural gas supply to ESRS’ DRI plants, forcing the company to utilize alternative higher cost production methods.
3. Slower than expected cuts, or even an increase, in interest rates.

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 EZZ STEEL April 24, 2018

Income Statement (EGP mn) FY17a FY18f FY19f FY20f

Total Revenues 41,742 53,902 58,578 64,339
COGS (ex. Dep) 36,002 46,772 51,059 56,284
Gross Profit 5,740 7,130 7,520 8,055
Ongoing Provisions -96 -228 -279 -337
SG&A -1,320 -1,802 -2,242 -2,476
EBITDA 4,324 5,100 4,998 5,242
Depreciation & Amortization 1,450 1,549 1,565 1,551
EBIT 2,874 3,551 3,433 3,691
Net Interest Income (Expense) -3,187 -2,840 -2,221 -1,683
Other Income/Expense 29 1 1 1
EBT -285 711 1,213 2,009
Tax Expense 900 164 277 456
NPAT -1,184 547 936 1,553
Total Extra-Ordinary Items 87 0 0 0
Net Profit Before Minority -1,097 547 936 1,553
Minority Interest 483 927 986 1,156
Net Profit -1,580 -380 -50 397

Balance Sheet (EGP mn) FY17a FY18f FY19f FY20f

Cash and Marketable Securities 4,738 5,981 6,093 5,980
Net Accounts Receivable 188 254 274 301
Net Inventory 7,462 9,599 11,234 12,339
Other Current Assets 4,107 5,435 6,487 6,477
Total Current Assets 16,496 21,270 24,089 25,097
Net Fixed Assets 26,625 25,770 24,363 23,669
Other Long Term Assets 3,482 2,834 2,834 2,539
Total Long Term Assets 30,108 28,604 27,197 26,208
Total Assets 46,604 49,874 51,286 51,305
ST Debt & CPLTD 13,905 15,388 20,058 17,688
Accounts Payable 4,775 5,766 6,295 7,093
Other Current Liabilities 3,697 4,379 4,768 5,805
Total Current Liabilities 22,377 25,534 31,121 30,587
Long Term Debt 9,767 9,548 4,984 4,387
Other Long Term Liabilities 5,642 5,751 5,876 5,705
Total Long Term Liabilities 15,409 15,299 10,860 10,092
Total Liabilities 37,785 40,833 41,982 40,679
Total Equity (Incl. minority) 8,818 9,041 9,304 10,626
T. Liabilities & Equity 46,604 49,874 51,286 51,305

Financial Indicators FY17a FY18f FY19f FY20f

Valuation
EPS -2.91 -0.67 -0.06 0.76
P/E NA NA NA 38.93
P/B 1.83 1.78 1.73 1.52
DPS - - - -
BV/Share 16.2 16.6 17.1 19.6
EV/EBITDA 9.10 8.05 8.24 7.29
Growth and Profitability
Sales Growth 80.01% 29.13% 8.67% 9.83%
Gross Margin 13.75% 13.23% 12.84% 12.52%
EBITDA Margin 10.36% 9.46% 8.53% 8.15%
NI Margin -3.79% -0.70% -0.09% 0.62%
RoA -3.40% -0.75% -0.06% 0.73%
RoE -14.18% -3.29% -0.29% 3.10%
Leverage
NET Debt (EGP mn) 18,933 18,955 18,949 16,095
Interest Coverage 0.78 1.06 1.27 1.76
Debt/Equity 2.68 2.76 2.69 2.08

SIGMA Research  4
 EZZ STEEL April 24, 2018

Investment Thesis

Working capital headache is being relieved, progressively

ESRS’ incapability of securing the desperately needed financing to cover its ballooned working capital has been the major setback that hindered
it from fully capitalizing on the favorable EGP flotation during FY17. Luckily, the management’s efforts to overpass this issue are finally paying off
starting FY18. In addition, the recent reconciliation between Ahmed Ezz (ESRS owner) and the local government came to support these efforts.
The settlement between Ahmed Ezz and Egypt’s government sees the first paying as much as EGP 1.8bn to the country, of which EGP 600mn
recalled from his abroad money. In a subsequent move, the EU removed the name of Ahmed Ezz from its blacklist. The reached agreement fully
scraps, in our view, ESRS’ political risk that emerged post the 25th of January revolution, as such an agreement means that all charges against
ESRS’ owner are withdrawn. Although this has no direct impact on the company’s fundamentals, it will gain ESRS an access to different sources of
financing especially those with concerns regarding Ahmed Ezz’ unsettled dispute with Egypt’s government, such as foreign banks. This boosted
ESRS’ management efforts during the past year to secure the needed financing to operate its idled capacity in its subsidiaries and new DRI plant
and spread positive sentiment towards the group.
Moreover, and in our opinion; the unprecedented profits achieved by IRAX during FY17 spurred the banks appetite to finance Ezz Steel and assist
it in its plan to reach a fully DRI integrated group. According to its management, ESRS is expected to receive as much as EGP 1-1.5bn within this
year FY18, while it has an estimated working capital deficit of USD 150-200mn. In the same context, IRAX OGM approved the distribution of EGP
802mn as cash dividends, of which EGP 441mn will be received by ESRS through its 55% stake in IRAX. ESRS plans to inject these dividends to
IRAX’ troubled sister companies.

Anti-dumping fees grant a wide room for margins control…

In December 2017, the Ministry of Trade and Industry decided to extend the anti-dumping fees imposed in mid-2017 for 5Yrs to protect local steel manufacturers
from the dumping activities exercised by foreign exporters to Egypt. The decision stated a 17% CIF import tariff on imported rebar from China, 10-19% CIF from
Turkey and 15-27% CIF from Ukraine. This granted local manufacturers a long-awaited edge over finished steel importers as they can now monitor local and
global changes and adjust their selling prices accordingly with no threats from cheap imported steel. Nonetheless, we believe local manufacturers will not have
a fully free hand in increasing prices.

Local vs. Turkish Rebar Price (USD/ton)

800

700

600

500

400

300
Apr-17

Aug-17
Jan-17

Jan-18
Feb-17

Nov-17

Feb-18
Jul-17
May-17

Sep-17
Jun-17
Mar-17

Oct-17

Mar-18
Dec-17

Local Rebar Price Turkish Rebar Price

Source: Bloomberg

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 EZZ STEEL April 24, 2018

…and incentivizing market share growth

Since the anti-dumping fees imposition starting mid-2017 (it was initially temporal and then extended to 5Yrs in December 2017), imported steel
flow to the market considerably contracted paving the way for local steel manufacturers to cease the opportunity and acquire its lost market share.
Ezz Steel immediately snatched this lost market share through ramping up its rebar output, especially in EFS, to capture this opportunity and
expanding its already gigantic 50% rebar local market share.

Egypt’s Crude Steel Production (000’ ton) ESRS Group Rebar Production (000’s ton)  

700 800

700
650

600

600
500

550 400

300
500

200

450
100

400 0
Apr-17

Aug-17
Jan-17

Jan-18
Feb-17

Nov-17
Jul-17
May-17

Sep-17
Jun-17
Mar-17

1Q17

2Q17

3Q17

4Q17
Oct-17

Dec-17

IRAX ESR/ERM EFS

Production

Source: WSA Source: Company disclosure

Waning Iron ore prices as inventory piles up

As we explain in the industry synopsis section, we believe iron ore prices will drop from its last year’s highs (USD 70-80/ton) to normalize at an
average of USD 63-68/ton in the years 2020-2022. This bodes well for Iron ore producers in general, and for DRI method users in particular,
including Ezz Steel; as it will widen its cost advantage vs. other local production methods.

SIGMA Research  6
 EZZ STEEL April 24, 2018

Ezz Steel Anatomy

The story of Ezz Steel has two sides; (1) A lucrative flourishing side symbolized in EZDK, (2) a troubled side that is depicted in EFS, ESR and ERM.

1. IRAX’ turnaround post flotation to sustain and flourish

EZDK topped local steel companies since the beginning of 2017 in terms of both profitability and operational efficiency as it capitalized on; (a)
an 85% Y-o-Y surge in average local steel selling prices during 2017, (b) a stable flow of natural gas to the company’s economical DRI plant, (c)
the imposition of a tentative four months (later extended to 5Yrs) heavy anti-dumping fees over imported rebar from Turkey, China and Ukraine,
giving local companies sufficient room to raise selling prices, (d) a +50% foreign currency denominated debt that shielded EZDK against financing
shortages that handicapped its sister companies post liberalizing the EGP, (e) and a 15ppt upswing in average utilization rates Y-o-Y reaching 99%,
that was majorly bolstered by both (b) and (c), as IRAX looked to capture the market share lost by imported steel since anti-dumping fees came
into effect.

We see IRAX preserving its solid performance in the upcoming years, capitalizing on its DRI cost advantage (USD +100/ton against peers) and
increasing local selling prices, where both will help it to sustain its profitability margins at the achieved healthy levels. Meanwhile, IRAX’ enlarged
debt of EGP 11bn is not a major concern in our opinion as its FY17 debt/equity ratio stood at 2.60x (from 6.00x in the previous year) and we see it
reaching 1.73x during FY18. In the same context, we see interest coverage ratio reaching 3.63x in FY18 from 2.58x in FY17.

Steel Utilization Rate Sales & GPM (000’s EGP)

120%
32,000 19%

100% 18%
19%
31,500

18%
80% 18% 18%
31,000

18%
60%
30,500
17%
40%
30,000 17%
17%

20%
29,500
16%

0% 29,000 16%
FY17a

FY18f

FY19f

FY20f

FY17a

FY18f

FY19f

FY20f
Long Steel Flat Steel DRI
Sales Gross Profit Margin

Source: Company disclosure & Sigma Research Source: Company disclosure & Sigma Research

Interest Exp. & Interest Coverage (000’s EGP) Net Profit & NPM (000’s EGP)

12,000 7.00 3,000 15%

6.68

6.50
10,000 2,500 13%
6.00

5.50
8,000 2,000 11%
5.00
9%
6,000 4.50 1,500 9% 9%
8%
3.94
4.00 7%
3.63
4,000 1,000 7%
3.50

3.00
2,000 2.58 500 5%

2.50

- 2.00 - 3%
FY17a

FY18f

FY19f

FY20f
FY17a

FY18f

FY19f

FY20f

Interest Bearing Debt Interest Coverage Ratio Net Profit Net Profit Margin

Source: Company disclosure & Sigma Research Source: Company disclosure & Sigma Research

SIGMA Research  7
 EZZ STEEL April 24, 2018

2. ERM’s DRI sales to boost ESR/ERM’s profitability...

With a capacity of 1.85mn ton/annum, ERM’s new DRI plant is technically ready to operate at full capacity to fulfill ESRS’ ambitious plan of a fully
DRI integrated group. ESRS’ management has been ramping up efforts during FY17 to secure the required working capital financing through
tapping several sources both local and foreign. The management is finally reaping the fruits of its efforts, as ESRS is expected to receive large
sums of loans that will be injected to ERM’ DRI plant and to EFS. In addition, and as we mentioned above; the recent reconciliation between ESRS’
owner and Egypt’s government will facilitate ESRS’ access to foreign financing sources allowing the company to fully cover all of its working capital
needs within two years, in our opinion.

Through the new DRI plant, the management will satisfy all the DRI needs of EFS first and the remainder will be allocated to ESR. According to
ESRS’ management, the DRI selling price to both EFS and ESR is hovering around the global scrap prices and there are no plans, so far, to change
that in the future. Based on our forecast of global scrap and iron ore prices, this will allow ERM to achieve a gross margin ranging between 2-5%
on DRI sales. This will boost ESR/ERM’s margins and profitability allowing the company to cover its exaggerated interest expense and repaying its
heavy debt, in a gradual way.

Utilization Rate Sales & GPM (000’s EGP)

25,000 18%
90%

80%
16%
20,000
70%

13% 13% 14%

60%
15,000 12%

50% 12%

40% 10,000
10%
30%
5,000
8% 8%
20%

10%
- 6%
FY17a

FY18f

FY19f

FY20f
0%
FY17a

FY18f

FY19f

FY20f

Sales Gross Profit Margin

Long Steel DRI

Source: Company disclosure & Sigma Research Source: Company disclosure & Sigma Research

Interest Exp. & Interest Coverage (000’s EGP) Net Profit & NPM (000’s EGP)

9,600 1.40 400 1% 2%

1.25
9,400 200 0%
1.20 0%
9,200 -

9,000 1.00 (200) -2%

0.88 -3%
8,800 (400)
0.80 -4%
8,600 (600)
0.57 0.60 -6%
8,400 (800)

8,200 0.40 (1,000) -8%

8,000 (1,200)
-10%
0.11 0.20 -10%
7,800 (1,400)

7,600 0.00 (1,600) -12%

FY17a

FY17a
FY18f

FY19f

FY20f

FY18f

FY19f

FY20f

Interest Bearing Debt Interest Coverage Ratio Net Profit Net Profit Margin

Source: Company disclosure & Sigma Research Source: Company disclosure & Sigma Research

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 EZZ STEEL April 24, 2018

…and to bring EFS’ spring into the horizon

Since its inception, EFS was operationally hindered for various reasons ranging from political ones (Jan 2011 and Jun 2013 revolutions) to operational
(lack of natural gas supply and expensive scrap as a feedstock) and most recently a financial one (shortage of working capital financing). All of these
challenges are currently mitigated except the lack of working capital financing to the company and its main source of raw material, ERM’s new DRI
plant. As mentioned above, ESRS’ management is in the mid-way to secure a large portion of its desperately needed financing which paves the
way for the always down weighed EFS to reach historical utilization rates. Higher utilization rates coupled with towering local selling prices and
availability of feedstock (DRI) will finally allow the company to make its long anticipated turnaround.

EFS’ flexible 1.3mn ton/annum production was originally designed to produce flat steel only, then it was developed to produce either long or flat
steel but limited by a total production capacity of 1.3mn ton/annum. Most recently, ESRS’ incorporated extra modifications to the line enhancing
it to produce both long and flat steel without being limited to the 1.3mn ton/annum originally designed capacity. In other word, EFS can now
produce both long and flat steel with a capacity of 1.3mn ton/annum each.

Utilization Rate Sales & GPM (000’s EGP)

120% 25,000 18%

100% 20,000 13%

80%
15,000 7% 7% 8%

60% 4%
10,000 3%

40%

5,000 -2%
20%
-5%

- -7%
0%
FY17a

FY18f

FY19f

FY20f
FY17a

FY18f

FY19f

FY20f

Long Steel Flat Steel Sales Gross Profit Margin

Source: Company disclosure & Sigma Research Source: Company disclosure & Sigma Research

Interest Exp. & Interest Coverage (000’s EGP) Net Profit & NPM (000’s EGP)

6,000 0.70 - 70%

0.34
(200)
0.20 50%
5,000 -0.07
(400)

-0.30 (600) 30%

4,000
(800)
-0.80 10%
-3% -1%
3,000 (1,000)
-1.29 -9%
-1.30 -10%
(1,200)
2,000
-1.80 (1,400) -30%

(1,600) -45%
-2.28
1,000
-2.30 -50%
(1,800)

- -2.80 (2,000) -70%

FY17a

FY18f

FY19f

FY20f
FY17a

FY18f

FY19f

FY20f

Interest Bearing Debt Interest Coverage Ratio

Net Profit Net Profit Margin

Source: Company disclosure & Sigma Research Source: Company disclosure & Sigma Research

SIGMA Research  9
 EZZ STEEL April 24, 2018

Industry Synopsis

Escalating trade war

U.S. President Donald Trump decided to impose 25% tariff on imported steel (along with other products) from several countries including China,
Canada, Brazil, Turkey and others. This escalated fears in the global steel market about a potential trade war. The move comes similar to the one
took place in 2002 as U.S. President back then George W. Bush placed tariffs on imported steel. The tariffs were lifted by Bush himself in late 2003
as he found that the impact of the tariff on the U.S. welfare ranged between a USD 65.6mn gain to a USD 110mn loss.

Our initial implication on the move was that it bears a negative impact on global steel prices as the imposed tariff will enforce steel exporters to
U.S. to seek alternative markets to sell their products, which may lead to a global oversupply and weighing prices down. We dug deeper in the
matter and found that the U.S. was the world’s largest finished steel importer in 2017 with 34mmt, where Canada and Brazil captured the lion’s
share.

Our view is that the U.S. protection policies are mainly aimed against China, since the world’s largest steel importer is expected to reach an
agreement with its major trade partners and allies like Canada, South Korea and Brazil. The anticipated agreement will allow the U.S. to catalyze
its local steel industry without harming its allies’ interests. However, it will not make such an agreement with China. Hence, assuming the tariff on
Chinese steel will completely banishes all of China’s exports to the U.S., and bearing in mind that U.S. steel imports from China are only 2% of its
total finished steel imports; China will find itself loaded by a steel oversupply of 680k ton only. Subsequently, we believe that the anticipated
U.S. steel imports tariffs have a neutral impact on global steel industry.

Steel Exporters to U.S.

17%
22%

2%
14%
3%

4%

5%
10%
6%

8% 9%

Canada Brazil South Korea Mexico

Russia Turkey Japan Germany
Taiwan China Rest of the World

Source: Global Steel Trade Monitor

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 EZZ STEEL April 24, 2018

Normalizing steel and iron ore prices

Global steel prices saw a considerable jump in the past months to the USD 700/ton levels (before dropping again shortly) in anticipation of the
U.S. looming imported steel tariffs. Apparently, these jumps were driven by speculation rather than fundamental reasons, and hence; we see steel
prices averaging at USD 635/ton within this year before normalizing at the range of USD 580-603/ton in the following years.

The People’s Republic of China (the world’s largest steel producer and consumer) is expected to keep pushing forward in its policy to cut local
steel output which was spurred by; (1) China’s adherence to combat air pollution and global warming, (2) and to cool down the global fury arose
from dumping the international market with a glut of cheap steel in the past two years. China’s policy to curb its glut is actually working as we saw
massive drops in its exports starting July 2017. Subsequently, we don’t see prices dropping again to the USD 300-400/ton levels.

China’s Monthly Steel Production & Exports (000’s ton) China’s Domestic Rebar Price (USD/ton)

80000 8000 900

800
70000
7000
700
60000
600
6000
50000
500

40000 5000 400

30000 300
4000
200
20000

3000 100
10000
0
Apr-18

Apr-16

Apr-15
Aug-17
Aug-17

Aug-16

Aug-15
Jan-18

Jan-17

Jan-16

Jan-15
Feb-18

Nov-17

Feb-17

Nov-16

Feb-16

Nov-15

Feb-15
Jul-17

Jul-16

Jul-15
Sep-17

May-17

Sep-16

May-16

Sep-15

May-15
Jun-17

Jun-16

Jun-15
Mar-18

Mar-17

Oct-16

Mar-16

Mar-15
Dec-17

Dec-16

Dec-15
0 2000
Apr-17

Aug-17
Jan-17

Jan-18
Feb-17

Nov-17
Jul-17

Feb-18
May-17

Sep-17
Jun-17
Mar-17

Oct-17

Dec-17

Domestic Rebar Price

Steel Production Steel Exports - RHS

Source: Bloomberg Source: Bloomberg

Despite the recent steel output cuts by the world’s largest iron ore importer, China, iron ore miners kept ramping up their output to capitalize on
the acceleration in the commodity price in the last year. The jump in iron price was mainly attributed to; (1) Chinese steel producers ramped up
their output before the application of the strict output cut policy undertaken by the Chinese government starting winter 2017, leading to higher
demand on iron ore, (2) higher oil prices, (3) and the recent speculation over the U.S. tariffs on imported steel. It is worthy note; iron ore producers
have been accelerating their output in the past few years in order to expel small players of the market. The depicted below chart shows the
acceleration in iron ore inventory levels in the Chinese ports.

Hence, we believe iron ore prices will drop from its highs USD 70/ton level to normalize at a range of USD 63-68/ton in the years 2020-2022.

Iron Ore Inventory in Chinese Ports (000’s ton) Global Iron Ore & Scrap Prices (USD/ton)

450
16000
400
14000
350
12000
300
10000
250
8000
200
6000
150
4000
100
2000
50
0
Apr-17

Aug-17
Jan-17

Jan-18
Feb-17

Nov-17
Jul-17

Feb-18
May-17

Sep-17
Jun-17
Mar-17

Oct-17

Dec-17

0
Nov-15

Nov-16

Nov-17

Mar-18
May-15

May-16

May-17
Mar-15

Mar-16

Mar-17

Jan-18
Jan-15

Jan-16

Jan-17
Jul-15

Jul-16

Jul-17
Sep-15

Sep-16

Sep-17

Iron Ore Inventory

Iron Ore Price Scrap Price

Source: Bloomberg Source: Bloomberg

SIGMA Research  11
 EZZ STEEL April 24, 2018

FY17 Results Commentary

A gradual Q-o-Q improvement in top line, bolstering gross profit

Ezz Steel started FY17 burdened by its incapability to produce at high utilization rates with a significant shortage in financing and its inability to
provide one. 1Q17 was the lowest and most fragile in terms of both sales revenue and gross profit, as the shortage of financing peaked. The three
consecutive quarters saw significant improvements, progressively, as ESRS capitalized on; (1) successive jumps in local selling prices backed by the
anti-dumping fees applied starting mid-2017, (2) higher utilization rates, (3) and substituting imported steel’s lost market share in the rebar market.
Thus, ESRS’ gross profit margin reached its peak of 17% within the last quarter of the year.

Al Ezz Dekhila (IRAX) was the major contributor to this improvement as it kept its growing euphoria starting FY17 capitalizing on its cost advantage
against local peers, as it utilizes DRI method in production that offers a USD+100/ton cost advantage vis-a-vis other local production methods.

ESRS Sales Revenue and GPM (000’s EGP) Subsidiaries Contribution to Gross Profit

120%
14,000 20%

100%
12,000
18%
17%
80%
10,000
16%
15%
8,000 60%

14%
6,000 40%

12%
4,000 11% 20%
11%

10%
2,000 0%

0 8% -20%
1Q17

2Q17

3Q17

4Q17
1Q17

2Q17

3Q17

4Q17

Sales Revenue Gross Profit Margin IRAX Rest of the group

Source: Company disclosure Source: Company disclosure

Increasing EBIT improves interest coverage ratio, Q-o-Q basis

The Q-o-Q improvement in gross profit was mirrored in a healthier EBIT which reached its peak by 4Q17 recording EGP 1,207mn with an EBIT
margin of 10%. This reverberated in a healthier interest coverage ratio as it improved from 0.32x in 1Q17 to 1.17x by 4Q17.

EBITDA & EBIT Margins Interest Exp. & Interest Coverage (000’s EGP)

14% 1,200 1.40

12% 13%
1.17
12% 1.20
1,000
1.02
10% 1.00
10% 800
9%
8% 8% 7% 0.80
600
6% 0.60
0.43
400
4% 0.32 0.40
4%
3% 200
2% 0.20

0% 0 -
1Q17

2Q17

3Q17

4Q17

1Q17

2Q17

3Q17

4Q17

Interest Expense Interest Coverage Ratio

EBITDA Margin EBIT Margin

Source: Company disclosure Source: Company disclosure

SIGMA Research  12
 EZZ STEEL April 24, 2018

Bottom line smashed under heavy one offs

ESRS’ bottom line was heavily weighed under a one off deferred tax expense of EGP 766mn in FY17 which represented 48% of the company’s
total net loss of EGP 1,580mn. Excluding the one off deferred tax expense and Fx gains, we found that ESRS recorded a net loss of EGP 901mn in
FY17. On quarterly basis, we found that ESRS actually recorded a net profit of EGP 84mn in 4Q17 after excluding these one offs. Unfortunately, the
realization of both deferred tax revenues and expenses is nearly impossible to estimate as it is decided by the local tax authority. It is important to
mention that ESRS’ deferred tax assets position stood at EGP 2,046mn by the end of 2017, while its deferred tax liabilities settled at EGP 3,782mn
in the same period.

ESRS Consolidated Key Figures (EGP Mn) FY16a FY17a 1Q17a 2Q17a 3Q17a 4Q17a
Sales Revenue 23,189 41,742 8,113 9,801 11,439 12,389
Gross Profit (ex. Dep) 3,327 5,740 887 1,041 1,707 2,105
Gross Profit 3,327 5,740 887 1,041 1,707 2,105
EBITDA 2,405 4,324 610 722 1,421 1,571
EBIT 1,563 2,883 255 361 1,060 1,207
Interest Expense 1,826 3,703 803 832 1,037 1,031
FX gain (loss) 816 87 96 27 38 -74
Net Profit -1,580 -521 -550 -315 -194 -194
Net profit excluding one offs -328 -901 -482 -438 -65 84
FY16a FY17a 1Q17a 2Q17a 3Q17a 4Q17a
Change in Sales Revenue 39% 80% - 21% 17% 8%
Change in Net Profit NA NA - 6% -43% -38%
Gross Profit Margin 14% 10% 11% 11% 15% 17%
EBITDA Margin 10% 7% 8% 7% 12% 13%
EBIT Margin 7% 9% 3% 4% 9% 10%
Interest Coverage Ratio 0.86x 0.78x 0.32x 0.43x 1.02x 1.17x
Net Profit Margin 1% -4% -6% -6% -3% -2%
NPM excluding FX gain (loss) -1% -2% -6% -4% -1% 1%

SIGMA Research  13
 EZZ STEEL April 24, 2018

Research Team Sales and Trading

Aboubakr Emam, CFA Wael Amr
Head of Research Group Manager
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Tel: +(202) 3335 7575 Ext: 256 Tel: +(202) 3335 6923

Omnia Saber Yasmine Zeidan

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Financial Analyst
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Disclaimer
This report has been prepared by Sigma Capital based on sources believed to be reliable and in good faith, but no representation or warranty
or guarantee can be given as to the accuracy or completeness of the information it contains. All opinions contained herein (unless otherwise
stated) are entirely those of Sigma Capital and subject to change without notice. This report should not be construed as a solicitation to sell,
buy or subscribe to any securities and Sigma Capital does not accept any liability for any loss whatsoever arising from the use of this report or
its contents or otherwise arising in connection therewith. The Sigma Capital group of companies may have working relationships with or long
positions in some or all of the entities mentioned in this report and may have acted on information contained herein prior to or immediately
after the issuance of this report. In view of investment decisions, recipients of this report should complement it with proprietary analysis and due
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SIGMA Research  14