Beltone Maintains ‘Buy’ Rating for Ezz Dekheila’s Stock

Beltone Financial set, in a recent study, El Ezz Dekheila Steel (EZDK) (IRAX.CA) fair value at EGP 724.75/share, offering an upside of 24% from the current market price and warranting a Buy recommendation.

It is worth noting that, El Ezz Dekheila Steel reported consolidated financial results posting a net profit of LE 705,264,342 for the period from 01/01/2013 till 30/06/2013.

Noting that, it posted net profits of LE 232,537,549 for the comparable period.

Beltone stated that, EZDK released another set of strong results for 2Q2013, with a bottom line of EGP343 million, down 4% from the peak recorded in 1Q2013, yet up 86% y-o-y.

The figure beats our estimate of EGP210 million. No consensus estimate is available. The better-than-expected results on the consolidated level stems from higher operating margins at EZDK stand-alone, which we believe resulted from using the remaining lower-priced raw material inventory, and likely FX gains from EFS, whose financials are USD-denominated.

Revenue came in at EGP4.25 billion, adding 3.2% q-o-q, 11.7% y-o-y, and coming in 4.4% ahead of our estimate. As expected, the company continued to grow its top line, benefiting from higher prices, stemming mainly from the depreciation in the local currency, where local steel rebar prices advanced c.6% q-o-q and c.11% y-o-y.

This was also supported by the protection fee on imported steel (c.6.8%), which was effective during the period. EBITDA margin recorded 15.4%, versus our estimate of 14%, declining 2pps q-o-q from the record level recorded in 1Q2013, while adding 2.5pps y-o-y. We believe the q-o-q decline resulted from higher raw-material prices, mainly iron ore pellets, as EZDK managed to secure iron ore at very favorable prices in 1Q (USD126/ton), in addition to higher SG&A expenses (up 23%, at c.2.6% of revenue).

Meanwhile, the y-o-y improvement we believe resulted from higher steel prices and lower iron ore pellet prices. EBITDA recorded EGP653 million, down 8% q-o-q but up 33% y-o-y. Net financing expenses (inclusive of FX) came in at EGP131 million, adding 49% y-o-y, reflecting a 13% increase in total debt. The company remains highly leveraged with net debt to EBITDA at 8.4x.

We like the name given its strong market presence and solid business model that allows it to maximize its profitability relative to peers. The stock gained c.36% during the last three months and is up 21% YTD. Our SOTP-DCF based valuation incorporates a 20% cost of equity, WACC of 13% for EFS and 14% for EZDK, and a terminal growth rate of 3.5%.

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