Alert on H1 2011 – Maintaining a HOLD on Ezz Steel on high risks surrounding the stock

Ezz Steel reported a 24% y-o-y jump in revenues in H1 to EGP 9,334M, led by strong private residential construction activity despite the commotions in the local market during the first few months of the year. Sales of long steel which almost fully serves the domestic market and constitutes the larger component of the revenue pool rose by 6% y-o-y to 1.6 million tons. Operating income increased by 1.5% to EGP 919M while H1 net profit dropped by 62% y-o-y to EGP 185M due to a deferred tax liability adjustment. We considerably reduce the fair value to EGP 4.3 from EGP 9.5 previously as the situation in Egypt continues to deteriorate due to the political deadlock in the country. Most of the fair value adjustment is due to increasing the risk premium to account for (1) depreciation of the Egyptian Pound (2) Additional risk for investing in Egypt during extremely uncertain times (3) A highly leveraged balance sheet (4) Legal disputes surrounding steel licenses and the EZDK acquisition.

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Ezz Steel – H1 2011 Review

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