Today’s Trading Playbook
KEY THEMES
Yesterday, Al Ezz Dekheila Steel - Alexandria [IRAX] announced that on 9 December 2021 its BoD ratified an IFA study regarding the fair value of Egyptian Steel. Furthermore, the BoD agreed to buy an 18% stake of Egyptian Steel for EGP2.5bn to be financed using IRAX’s internal resources. The 18% target stake was originally 30% but will be diluted, thanks to undergoing a capital increase. As way of background, Egyptian Steel is a semi-integrated producer, with a nameplate capacity of c.1.7mtpa.
The Good
- The deal will see Ezz Steel [ESRS] exploring growth in an inorganic approach, capitalizing on any growth prospect in Egypt’s steel market.
- ESRS’s effective market share will increase slightly after adding the attributable market share of Egyptian Steel to ESRS sizable market share of c.50%.
- Upon completion of the deal, ESRS may consider Egyptian Steel as a sister company, hence adding 18% of Egyptian Steel’s bottom line to ESRS’s P&L. Otherwise, only cash dividends from Egyptian Steel would be accounted for.
- ESRS has successfully negotiated the payment of the deal value over three installments, 50% of which will be paid now and the rest in two equal installments over the next two years. This should help alleviate the pressure on IRAX’s balance sheet.
The Bad
- The deal value came ahead of our expectations and possibly the market’s for that matter, which in return raises concerns that it may be a bit expensive. Furthermore, the disclosed IFA summary report did not help much on this front, offering limited information.
- Egyptian Steel’s earnings profile is unclear. According to data derived from the IFA summary report, Egyptian Steel’s book value of equity is almost entirely composed of paid-in capital and paid under capital increase, indicating that the company has little to no retained earnings.
The Ugly
- Given that it’s a non-controlling stake, it’s tough to see short-term scenarios with ESRS benefiting off its recent acquisition in a meaningful way.
- ESRS is already a highly-leveraged company operating in a highly-volatile industry. Combined with global market volatility, acquiring the 18% stake will likely increase ESRS’s exposure, hence adding another layer to its risk profile.
All in all, it remains to be seen how ESRS/IRAX could benefit of this minority stake in a dynamic way.
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