KEY THEMES
Ezz Steel [ESRS] Q2 2021 consolidated net earnings after minority grew to EGP800mn (i.e. EPS of EGP1.47) vs. net losses of EGP984mn a year earlier. Profitability turnaround was sparked by a 140% y/y growth in revenues to EGP16.9bn. From a quarterly window, EPS grew 2% q/q, while top line expanded at a 25% speed.
ESRS was able to utilize the rise in average selling prices to counter increasing iron ore prices, and maintain a robust GPM of 21% during the quarter vs. nearly 0% a year earlier. We note that the strong bottom line performance was further complemented by 19% lower borrowing cost y/y to EGP804mn.
Volumes came in stronger this quarter, with 12% q/q higher volumes, mainly driven by a 28% increase in long rebar volumes. Meanwhile, flat steel volumes slipped 6% q/q. Flat steel volumes contributed 40% to overall volume mix, which compares to a 47% contribution in Q1 2021 as a result of rebounding long volumes. Management believes that the reissuance of building permits should induce more volume recovery in the local market towards year end.
On an annualized basis, ESRS is trading at a ridiculous 2021 P/E of only 1.3x. After more than seven months in 2021, we think selling prices will remain relatively high for the rest of the year, with prices normalizing in line with a gradual improvement in local volumes afterwards. Furthermore, iron ore prices have started to cool off notably recently, which will help support the long-term outlook of the company’s cash spread. We think the prospect for Q3 2021 is fairly strong on the back of: (1) the solidity of selling prices so far in 2021 and (2) the recent action by China to lower export rebates on products, including cold rolling, which consequently positively affected HRC prices globally.
POSITIVE
ESRS: A strong Q2 2021 earnings report could push the stock further north