KEY THEMES
Two stories are worth noting today, both related to one of the two themes we think will drive market performance over the coming period: earnings reports. It is Ezz Steel [ESRS] that reported its Q1 2021 results this morning and Palm Hills Developments [PHDC] that held its Q1 2021 earnings conference call yesterday.
For the former, our materials analyst Mohamed Saad thinks that ESRS’s Q1 2021 are strong. Consolidated net earnings grew to EGP784mn (i.e. EPS of EGP1.47) vs. net losses of EGP860mn a year earlier. The robust improvement in bottom line was guided by a 25% y/y growth in revenues to EGP13.5bn. ESRS was able to utilize the rise in average selling prices to counter increasing iron ore prices, and hence achieve a groundbreaking GPM of 20.6% during the quarter vs. a mere 0.7% a year earlier. We note that the strong bottom line performance was further complemented by 19% y/y lower borrowing costs to EGP869mn.
Breaking down ESRS sales performance during the quarter, we find that the 25% higher revenues were the product of a 65% increase in flat steel volumes, coupled with an increase in both the long and flat average selling prices by 37% and 44%, respectively. Operationally speaking, this has more than offset lower long sales volume as well as higher iron ore prices.
On an annualized basis, ESRS is now trading at a ridiculous 2021 P/E of only 2x. However, the trick is to be able to maintain average selling prices at such levels onward, which we think is not highly probable. Selling prices may remain relatively high during 2021, yet we would pretty much expect a price correction next year. Right now, the stock is enjoying for the first time in a number of years a relatively sound cash spread. However, we believe GPM will eventually normalize to the low 20s domain as both rebars and iron ore prices hit their normalized targets.
On a different note, our real estate analyst Kareem Farid noted below key takeaways from PHDC’s conference call:
- PHDC expects to deliver Badya by Q3 2021, one year earlier than contracted. Meanwhile, North Coast project Hacienda West, whose launch was delayed due to licensing issues, will be launched in July 2021. Additionally, PHDC will launch new parcels in its other North Coast projects Hacienda Bay or Hacienda White in the summer. PHDC’s management expects the construction work for Badya’s university to begin by end of year, linking the launch of a new phase in Badya labelled “The Village” to the university as the new phase will be overlooking it. Hence, any delays in construction of the university will delay the phase as well.
- The execution of 36mn treasury shares which was approved by the shareholders will be written off by end of year.
- Regarding PHDC’s project in East Cairo, Palm Hills New Cairo (PHNC), management expects the project to require EGP2.5bn in financing. The project area is split 80% residential and 20% commercial.
- Management is still undecided on its sales strategy (selling raw land or developing the land) for Botanica located in new Sphinx City, for which they have received shareholders’ approval to waive off 50% of Botanica to New Urban Communities Authority (NUCA). Botanica stretches over 1,283 feddans (5.39mn sqm), in return of all needed infrastructure and utilities, as well as changing the land utilization purpose from agricultural to residential and an in kind payment to NUCA.
POSITIVE
ESRS: Q1 2021 earnings should drive tXxhe stock higher, we think. Please refer to our quick analysis above.