THE COMPANY: In just over 10 years, Ezz Steel has become the largest independent steel producer in the Middle East and Africa, with a total capacity of 5.8m tpa (3.5m tpa of long products and 2.3m tpa of flat products). It is an operational and holding company with majority stakes in three subsidiaries:

• Al Ezz Dekheila Steel (EZDK), in which Ezz Steel holds a 55% stake, is an integrated direct reduced iron (DRI)-fed mini-mill in Alexandria, with a total capacity of 3m tpa (2m tpa of long products and 1m tpa of flat products);

• Al Ezz Flat Steel (EFS), in which Ezz Steel owns a 64% direct and indirect stake, is a 1.3m-tpa steel scrap-fed minimill in Suez that originally started as a flat steel producer but later added a billet caster and a rolling mill, which increased the flexibility of its product portfolio by allowing it to utilise its liquid steel capacity to produce either long or flat steel;

• Ezz Rolling Mills (ERM), in which Ezz Steel holds a 99% stake, is a rolling mill that is often paired with Ezz Steel Rebars (ESR); together, they are a scrap/billet-fed steel rebar operation with a finished capacity of 1.5m tpa and a billet capacity of 0.8m tpa. Despite a 16% drop in the local rebar market in 2011 on the back of the January 25 revolution and the resulting political instability, Ezz Steel managed to grow its long product sales 7% year-on-year (y-o-y) to 3.6m tonnes, which included sales at EFS during the commissioning phase.

In our view, this growth was a result of the company’s strong position in the local arena, maintaining a 61% market share, in addition to the favourable supply/demand dynamics, judging by domestic liquid steel capacity. As for flat steel, which is usually more export-directed, volumes were down 21% y-oy to 1m tonnes, coming mainly on the back of the suspension of flat steel production at EFS during the installation of the new long product rolling mill.

On the group level, Ezz Steel’s revenue grew 12% y-o-y to LE18.6bn ($3.1bn) in 2011 on higher steel prices, while the earnings before interest, taxes, depreciation and amortisation (EBITDA) rose 16% yo-y to LE2.4bn ($401.7m), mainly on improved margins at EZDK. The company reported an EBITDA/tonne of $95 in 2011, up from $80 in 2010. Nevertheless, its bottom line declined 20% y-o-y to LE202m ($33.8m) on a corporate tax rate increase in Egypt coupled with a one-off deferred tax charge at EZDK and wider losses at EFS and ESR/ERM. As of December 2011, Ezz Steel’s net debt stood at LE7.9bn ($1.3bn), with an LE1.2bn ($200.8m) cash balance, implying a net debt/equity ratio of 1.19x.

DEVELOPMENT STRATEGY: According to government reports, Ezz Steel will be allowed to retain its two production licences, which involve two DRI modules with a total capacity of 3.7m tpa and a 1.6m tpa melt shop, for a total fee of LE660m ($110.5m). An official settlement contract is yet to be signed, but under the agreement, 15% of the fee is to be paid up front and the balance over five years. In our view, this is quite positive for Ezz Steel, given the strategic importance of the investment. The company will install the first DRI module at EFS at a total investment cost of $430m, of which $311m has already been paid. The new module is 100% owned by Ezz Steel – through ERM – to ensure maximum return to its shareholders and will sell DRI to both EFS and ESR to replace scrap procurement. We expect commercial production to start by 1Q 2013. The cost advantage of DRI versus buying scrap was $98/tonne in 3Q 2011, which mostly explains the margin differential between EZDK and ESR/ERM. Assuming the same cost savings, the new DRI plant should add LE928m ($115.3m) to the group’s EBITDA.

Over the longer term, Ezz Steel plans to develop a domestic finished steel capacity of 7m tpa, which will make it the clear-cut regional leader and a strong mid-sized steel producer by current global standards.