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Global Research

July 2009

Sector

Egypt Steel SectorEgyp

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Reinforcing Demand...

Global Investment House KSCCGlobal Tower,P.O. Box 28807 Safat13149 KuwaitTel: (965) 22951000Fax: (965) 22951299Email: [email protected]://www.globalinv.net

Global Investment House stock market indices can be accessedfrom the Bloomberg page GLOHand from Reuters Page GLOB

Faisal Hasan, CFAHead of [email protected] No:(965) 22951270

Mahmoud SoheimManager-Egypt [email protected] No: (202) 37609526

Cherine Fayez Farkouh, CFAFinancial [email protected] No: (202) 37609526

Table of Contents

World Steel Sector amid Financial Crisis 1

Consumption 5

Production 7

Global Outlook for the Steel Industry 14

MENA Region 16

Consumption 17

Production 18

Outlook 26

The Egyptian Steel Sector 27

Consumption 30

Production 31

Outlook 45

Al Ezz Steel Rebars Company (Ezz Steel) 47

Company Overview 51

Consolidated Financial Performance 2008 & Q1 2009 60

Main Forecast Assumptions 67

Valuation and Recommendation 73

Al Ezz Dekheila Steel Company – Alexandria (EZDK) 81

Company Overview 84

Financial performance 2008 & Q1 2009 89

Main Forecast Assumptions 95

Valuation and Recommendation 98

Global Research - Egypt Global Investment House

�Egypt Steel SectorJuly 2009

World Steel Sector amid Financial Crisis

Since mid 2008, the state of the global economy has been going from bad to worse, due to the failure of the real estate sector and the fatal errors committed in the credit markets. In September 2008, the problem climaxed with the bankruptcy of Lehman Brothers and as a result, a collapse in all global markets commenced, leading to a global economic recession.

The world financial turmoil took a severe toll on the global steel sector. The sluggish demand has forced many industries down the drain. Moreover, consumer spending started to feeble and housing bubble exploded, on the back of clients’ defaults. The effect of the crisis on the housing sector is plainly demonstrated in the development of the housing starts in the US, which started to decline since the real estate sector begun to fall, precisely since Q2 2006, reaching 1.86mn units at annual rate, down from 2.12mn units at annual rate in the previous quarter. As the financial crisis propelled unexpectedly in the second half of 2008, housing starts tumbled from 1.03mn units at annual rate in Q2 2008 to 0.88mn units at annual rate in the following quarter and further more to 0.66mn unit in the last quarter of the year.

Chart 01: Housing Starts Development in the US

Source: Manufacturers Alliance/MAPI

In addition, the manufacturing activity flattened, hitting severely the automobile industries, which witnessed a harsh drop in motor vehicles sales in US from the beginning of 2008, as they declined to 15.2mn units at annual rate in the first quarter, from 16.0mn units in Q4 2007. Sales kept declining until they reached 10.3mn units at annual rate by the last quarter of 2008.

Chart 02: Global Industrial Production Indices Chart 03: Motor Vehicle Sales Development in the US

Source: Institute for Trend Research, February 2009 Source: Manufacturers Alliance/MAPI

After the construction and automobile manufacturing sectors, the two main catalysts for steel industries, were drastically influenced by the financial crisis, the steel manufacturers are facing nowadays lethargy in demand, as the steel acts as an intermediary for many industries and downstream productions.

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2 Egypt Steel Sector July 2009

Background of the Steel Sector

The steel industry has always been considered the bedrock for economic growth and development. Steel is everywhere, from buildings to cars, bridges to planes. It plays a key role in our day to day lives and is a vital component of the world we live in today. During the 20th century, the industry grew substantially and was deemed to be one of the key ingredients for the rise and dominance of the west. The giant leaps and advancements achieved in the development of new technologies have had an enormous impact on the industry in terms of efficiencies, capacities, costs and labor. During the dawn of the steel industry, huge amounts of labor were required to produce ‘relatively’ small quantities. However, the image of the industry has drastically changed nowadays, as less and less workers are required to operate large plants. Moreover, new laws and regulations have had a significant impact on both the waste management and recycling policies of steel producers worldwide.

As the 20th century drew to an end, the emergence of new economic powerhouses such as Brazil, Russia, India and China, and mammoth infrastructure and housing projects in the Middle East have reignited the industry and have created new and enormous potential for development within the industry.

Steel as an economic barometer

The industry, by its nature, is a greatly cyclical industry, as demand and supply are highly correlated with the state of the global economy and in particular the construction and the automobile industries. Hence, the industry is seen as a barometer of economic growth and development. Chart 04: World Steel Production & World GDP (1980-2008)

Source: IMF and World Steel Association

The ‘commodity like’ nature of steel makes its price volatile, especially now at times where the future of the global economy appears gloomy, due to the failures in most financial markets.

Raw Materials

The main raw materials used in the production of steel are thermal coal, coking coal, iron ore, steel scrap and natural gas. Iron ore and steel scrap are the main raw materials used to create and manipulate the composition of steel, coal is used in carbon reduction and natural gas is

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July 2009 Egypt Steel Sector �

used in both carbon reduction (reformed natural gas) and power generation. The availability and abundance of these inputs are not a major concern to the steel industry. Large reservoirs of natural gas are found primarily in the Middle East and Eurasia, while coal mines are found in large quantities in many regions. As for iron ore, the main suppliers in the world are Russia, Brazil and Australia, constituting 75% of the world reserves. Hence, the possibility to produce large amounts of steel is not of concern.

Production Process

The production of steel is an energy-intensive process, in which several steps are required to reach the final desired product. The two main principles applied to produce steel are the Basic Oxygen Furnace (BOF) and the Electric Arc Furnace (EAF).

Basic Oxygen Furnace

In the BOF process, the main raw materials, including iron ore, coal and limestone, are added together in a blast furnace, producing molten iron, which passes in the Basic Oxygen Furnace, after adding scrap in small quantities. The resulting output is either billets or slabs. It is worth mentioning that finished products are generally categorized into two large classes, long products and flat products. Wire rods, bars and sections are considered as long products and are mainly manufactured using billets. These products are primarily used in construction, building and reinforcement activities. On the other hand, slabs are used to produce flat steel, which include plates and Hot Rolled Coils (HRC). Plates are often used to create large pipelines and oil rigs, while HRC products can be used in making car bodies, cans and household appliances, such as washing machines and refrigerators, etc...

Figure 01: Basic Oxygen Furnace (BOF) Process

Source: Global Research

Electric Arc Furnace

The main raw materials of this process are either Direct Reduced Iron (DRI) or steel scrap. In the direct reduction process, lump iron oxide pellets are used as the main production inputs. The pellets are first heated, not melted, in the blast furnace and are then transferred to an Electric Arc Furnace, where they are melted. Carbon reduction is done using reformed natural gas mainly composed of methane, hydrogen and carbon monoxide, while scrap and alloys are also added to manipulate the composition. Afterwards, the process continues to produce semi-finished and/or finished products. Whereas the steel scrap process consists of simply reheating scrap in the Electric Arc Furnace to be casted into semi-finished products, to be further processed into finished products.

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� Egypt Steel Sector July 2009

Figure 02: Electric Arc Furnace (EAF) Process


It is commonly known that EAF process is more efficient, in terms of its use of energy, compared to the BOF process, which makes it more competitive, due to its lower production costs. It is worthy to note that a large proportion of production costs is related to energy. In some countries, it could range from 20-40% of total production costs. A secondary steelmaking process, which consists simply of recycling steel in an electric arc furnace, consumes 8.4 Million British Thermal Unit (MBTU) of energy for each ton of produced steel. The cost is much higher, when considering primary steelmaking, where the main raw material used is iron ore, energy used for the production reaches 19.1MBTU/ton.

Chart 05: EAF Steelmaking is energy efficient

Source: Steel Manufacturers Association

Steel and the environmentGlobal warming remains one of the key issues that are reshaping the industrial landscape worldwide, and since steel making is largely an energy-intensive industry, it is under pressure to develop new efficient and effective technologies to reduce carbon emissions. The United States has been able to reduce its carbon emission by about 17 % since 1990, however, more effort is required by nations globally to find better solutions. Universities and research centers worldwide are engaged in extensive research to find new techniques to reduce carbon emissions created in the heating process and some efforts have been directed to find alternative methods for carbon reduction while creating molten iron.

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Consumption

The importance of steel to many industrial sectors, which makes it essential for the development of all economies, was magnified in the world consumption figures all over the previous years. Large spending on mammoth infrastructure projects in developing economies, especially in Asia and the Middle East, contributed to the acceleration of demand for steel. Over the period from 2001 to 2007, steel consumption grew at a CAGR of 7.6%, reaching 1.209bn tons. As the world financial crisis abruptly hit all economies, the steel sector was harmed as well. This was reflected on demand for steel, as it decelerated by 0.9% a year later, reaching 1.197bn tons.

Chart 06: World Steel Consumption

Source: World Steel Association

China, backed by a booming economy, contributed to 36% approximately of the total world steel consumption in 2008. At a distant second came Asia and Oceania after excluding China, with a share of 22.4%, then came Europe with 17.6% of total demand.

Chart 07: World Steel Consumption by Region-2008


Emerging economies thrust steel consumption

Since the dawn of the new millennium, the landscape of the global economy has been witnessing a gradual change, as some booming economies have been able to mark their own stamp and solidify their new positions, as economic powerhouses. The primary drivers of this new world order are recognized as the BRIC countries, Brazil, a revitalized Russia, India and a roaring China. Moreover, petro-dollar fueled economies in the Middle East, coupled with galvanized economies in other parts of the world have created a brand new market for the steel industry. These new markets, backed by massive construction activities and a large appetite for growth and development, have propelled steel consumption, while developed economies demand for steel remained flat.

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The Mediterranean and Black sea regions have lately emerged as spots with strong demand potential for steel. For a long time, these regions were considered monotonous, as poor and under developed economies hindered the regions ability to grow, which in turn decreased its demand on steel, relative to other regions in the world. However, the situation now has drastically changed, as enthusiastic economic developments accompanied by a large appetite for steel have created a whole new untapped market. For example, in 2001, Turkey’s steel consumption was approximately 11.0mn tons, but as a result of economic reforms adopted by the government, it reached 21.3mn tons in 2008, implying a CAGR of 6.4% over the 7-year period.

Even though the outlook of the global economy appears gloomy, especially in the US and Europe, future demand is likely to remain intact in other parts of the globe. The key sector that is expected to stimulate demand will be the construction sector, which is the major driver for steel consumption in emerging markets.

Production Capacities

To satisfy thriving demand for steel in various nations worldwide, many capacity additions are to take place over the coming couple of years. As of 2008, global steel capacities were estimated at 1.65bn tons, compared to 1.07bn tons in 2000, growing at a CAGR of 5.7% over the 8-year period. In early 2008, the combined capacity of the world’s largest flat steel producers was an impressive 620mn tons, while the combined capacity of the largest long steel producers was 596mn tons.

Chart 08: Expected World Steel Production Capacities

Source: Orbis Steel

It is worth mentioning that global expansions might increase capacity levels to around 1.9bn tons by 2010, reflecting a compounded annual growth rate of 5.9% over the 10-year period from 2000-2010. It is worthy to note that half of the total world capacity in 2010 will be allocated in the BRIC countries.

The increased capacities from 2006 to 2010 are expected to be led by China with 33%, India 23%, while the rest of the Asian steel producers will account for 15% of total capacity expansions. The Chinese capacity additions are expected to reach 60mn tons in 2009, which could lead to overcapacity in the Country, even with the announced stimulus package that would partially motivate demand for steel.

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Chart 09: Expected Capacity Increases By Region (2006-2012)

Source: Orbis Steel

Production

2008 Output Levels

Over the past decade, the steel industry has witnessed impressive growth rates, backed by skyrocketing economies in emerging countries, particularly in Asia. In 2008, production levels grew steadily and reached their peak in May, where monthly production amounted to 120mn tons. However, the economic downturn soon caught up with the steel industry and monthly production levels started to gradually decrease, reaching 84.4mn tons in December. In 2008, global steel production of the year reached 1.33bn tons, representing a 1.1% y-o-y decrease. The world’s largest producers were China, Japan, US and Russia.

Chart 10: World and Selected Countries Steel Production Progress


In Europe, steel production has been hit by the global crisis in 2008 and in the EU 27 countries total production of the year reached 198.6mn tons, representing a 5.5% decrease, compared to the previous year. Overall, the Commonwealth of Independent States led the way with 114.0mn tons, Russia came second with 68.5mn tons, while production in Germany, Italy and Spain amounted to 45.8mn, 30.5mn and 19mn tons, respectively.

In North America, 2008 annual production in the USA decreased by 6.8% y-o-y, to reach 91.5mn tons, while Canadian production was down by 3.7% and reached 15.1mn tons, and Mexican production reached 17.6mn tons, representing a 0.3% y-o-y increase.

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In Asia, China, the world’s largest steel manufacturer, produced a stunning 502mn tons over the year, a 2.6% rise compared to 2007. Japan declined by 1.2% to reach 118.7mn tons, while India rose by 3.7% to reach 55.1mn tons.

Early signs of a bottom in 2009

In May 2009, global production amassed to 95.6mn tons, reflecting a 13.2% incline from the lows of December 2008, indicating positive signs for the industry. However, since the beginning of 2009, total production reached 448.3mn tons, which is a figure way below that achieved during the same period of the previous year, when total production reached 576.2mn tons. This decline represents a staggering 22.2% plunge and clearly reflects the sudden shock that the steel industry witnessed.

Chart 11: World Production Progress in 2008 and 2009


In Europe 27, steel production has continued its severe downward spiral, as total production from January to May 2009 reached 50.2mn tons, representing a stunning 44.5% drop, compared to the same period of the previous year, where total production reached 90.4mn tons. Moreover, the Commonwealth of Independent States followed a trend that was similar to that of its European peers and plunged by 31.9%, as total production reached 36.5mn tons, compared to 53.5mn tons during the first five months of 2008. It is worth mentioning that Russia, one of the top steel producers worldwide, witnessed a 30.3% drop in its production of the same period.

In North America, production in the USA from January to May 2009 reached 20.2mn tons, a 52.6% decrease compared to the same period of the previous year, while Canadian production was down by 49.5% and reached 3.6mn tons, and Mexican production reached 5.0mn tons, representing a 36.4% decline, as opposed to the period from January to May 2008.

In Asia, production for the first five months of 2009 in China, the world’s largest steel manufacturer, surprisingly increased by 0.7% compared to the same period of the previous year, and reached 216.6mn tons. It is worthy to mention that China’s output in May 2009 rose by 1.0% compared to the same month of 2008. Japan declined by 42.2% Y-o-Y in the first five months of 2009, while India declined by 0.6%.

The Chinese Enigma

China is by far the largest and most dominant force in the steel industry. The remarkable story of this once impoverished nation has been a marvel to observe. In the late 70’s and early 80’s the Chinese government decided to adopt smart economic strategies, which

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July 2009 Egypt Steel Sector 9

have gradually and effectively transformed the most populous nation on the planet into an industrial powerhouse, that is now recognized as the “world’s factory”. In 2008, the Asian giant accounted for more than a third of the world’s total production, about 37.8%, a remarkable increase from a market share of about 15% at the turn of the millennium. This represents an 18.7% CAGR, an impressive figure compared to the world’s production CAGR of 5.8% over an eight year period. When comparing these figures to China’s closest rivals, the results are even more impressive, as Japan, the second largest steel producer, had a modest 1.4% CAGR, the USA had a -1.33% CAGR and Russia achieved a 1.9% CAGR, over the same period. Moreover, China’s total production in 2008 rose by 2.6% compared to 2007, while production levels in other leading countries and regions declined Y-o-Y. The same trend continued in the period from January to May 2009, as steel producers around the world suffered compared to the same period of the previous year, except for China, which achieved a 0.7% growth in production, as mentioned earlier. It is worthy to mention that this distinctive growth is triggered by the immense stimulus package announced in the country, which is mainly directed towards construction and infrastructure.

Chart 12: World and Selected Countries Production Y-o-Y Growth Rate

Source: World Steel Association and Global Research

Prices

Over the last couple of years the price of steel has been on a rollercoaster ride to say the least. From billets to rebars, scraps to HRC, all types of steel and raw materials witnessed extremely volatile trends that saw prices reach record highs in mid-2008 and then a sharp decline by the end of the year. Price inflations were both “demand-pulled” and “cost pushed”, as surging demand and increasing raw material prices, coupled with astonishing oil prices, drove steel products prices to new highs. However, as the rising global economy took a dramatic u-turn in July 2008, fears of a financial meltdown spread venomously throughout the world, devastating demand on all commodities, while humbling steel prices from their perch.

Raw materials

One of the main concerns within the steel industry is the price volatility of the production inputs. Iron ore, scrap, natural gas and coal prices have witnessed upward trends, initiated in late 2007, due to increasing demand and energy costs. This obviously resulted in an elevation in the cost of production, which ultimately caused semi-finished/finished products prices to boom. The case was totally different after the financial crisis, as prices started to decline, in response to lower demand worldwide. An example to illustrate the volatility of input prices is scrap metal. The demand for scrap has been flying over the last couple of years, as Asia and the Mediterranean basin, especially the southern rim, have been consuming more and more

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�0 Egypt Steel Sector July 2009

scrap as construction activities increase. As a result, scrap prices increased to highs of about US$660/ton in June 2008, compared to US$260/ton just two years earlier. However, the scene has vastly changed now, as scrap prices have been taking a beating, due to immensely decreasing demand and trading activity and price levels ranged between US$200 and US$210/ton in April 2009, representing a decline of about 68.2% compared to prices in June 2008.

Chart 13: World Steelmaking Raw Materials & Input Costs Chart 14: DRI Pellets Price Development

Source: Steel on the Net Source: Vale Steel

As for iron ore, the major steel mining companies have announced considerable price cuts in 2009, as a consequence of lower demand for steel, affected by the international recession. Vale Steel announced a 28% cut in 2009 iron ore prices for Nippon Steel, along with a 48% reduction in iron pellets. Also, Rio Tinto set a 33% decline in its fines prices for many steel producers, along with a 44% reduction in lump prices. Moreover, BHP Billiton agreed to reduce its fines and lump prices to the Japanese Steel Company (JFE Steel) by 33% and 45%, respectively.

Taking into consideration that the iron ore prices are based on annual contracts, companies relying on iron ore as their basic raw material are expected to realize stronger margins on the back of lower production costs.

The graph below illustrates the intense variation that occurred in inputs prices between 2007 and 2008. Taking 2007 as a base year, raw materials prices for steel manufacturing skyrocketed significantly in 2008. The unprecedented growth in demand for steel resulted in an escalation of the prices of key production inputs, represented by iron ore, coking coal and scrap, by 72%, 205% and 159%, respectively.

Chart 15: Key Raw Materials Prices (2007/08)


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July 2009 Egypt Steel Sector ��

It is worth mentioning that the two largest steel mining companies after the Brazilian Vale Steel, Rio Tinto and BHP Billiton, which most operations cover Australia, have signed in 2009 a non binding agreement to construct a 50:50 Joint Venture (JV), including the iron ore assets and liabilities of both companies in Western Australia. The Joint Venture is expected to be formed by mid 2010, taking into consideration that the iron ore production and costs will be distributed evenly between Rio Tinto and BHP Billiton to be sold by their respective sales groups.

If accomplished, the new venture will have a significant role in the determination of iron ore prices in the future and is expected to affect prices internationally, as the combined share of these two companies is 16.4% of the world iron ore production in 2008, compared to a 17.3% share of Vale Steel.

Steel Products

The prices of both semi-finished and finished steel products followed an identical path as production input prices. As a result, the prices of all kinds of steel, such as rebars and HRC witnessed severe increases, due to high demand. This in turn, placed large strains on economic growth and development in some regions of the world, as the costs of large infrastructure and construction projects spiraled and sternly affected the feasibility of these projects. For example, steel wire rod prices reached US$1,067/ton in July 2008, compared to US$590/ton in the same period of the previous year representing an 80.8% increase. Chart 16: World Carbon Steel Transaction Prices

Source: Steel on the Net

However, in late July 2008, steel prices experienced sharp declines, as weak demand, triggered by recession fears and the surge of both the US dollar and Japanese Yen, especially against the Euro, led to increased stock pilings. In many parts of the world, the rate at which prices declined was much higher than the rate at which they initially increased, reflecting the sentiment surrounding the unprecedented times we now live in. For example, Cold Rolled Coil (CRC) prices declined by around 44% and slipped from US$1,186 in July 2008 to US$659 in December 2008. As of February 2009, CRC prices declined by 3.3%, to reach US$637/ton.

Flat steel products prices experienced woeful declines globally. During January 2009, HRC prices in the East Asia fell about US$640/ton from their peak in June 2008 to reach around US$435/ton, while in the Middle East, prices dropped by US$75/ton from their previous month’s level of US$475/ton.

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Chart 17: World Hot Rolled Coil Import Prices

Source: Steel Business Briefing and Global Research

Long products were no exception, taking a free fall from the historic level in mid-2008. During January 2009, rebars prices in East Asia plunged by about US$630/ton from their peak levels in June 2008, to reach US$460/ton approximately, while European rebars prices were being delivered at US$605/ton, compared to their record highs of US$1,322/ton in June 2008. In addition, rebars in North America were being sold at US$680/ton, reflecting a 37.6% drop from the July 2008 prices. Afterwards, rebars prices declined by more than 25% in the following 3 months and then bounced back in June at the same level of January 2009.

Chart 18: World Rebars Prices

Source: Steel Business Briefing and Global Research

Prior to the financial crisis, changes of scrap prices directed the movements in finished products prices, represented by rebars, that is why the ratio of scrap to rebars price was almost stable, ranging between 47% and 51%. However, during the booming phase of the steel sector, especially between January and June 2008, high demand pushed scrap prices higher, driving the ratio to higher levels. Nevertheless, as the crisis intensified, the price of scrap shrank drastically at higher pace than that of rebars, and the ratio dipped to around 27% in September. It is worth mentioning that the price of scrap reached 41% approximately of the rebars price, as of March 2009, which we believe is a sign of recovery, as the ratio is rebounding to its historical levels.

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200

400

600

800

1,000

1,200

1,400

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1,800

Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan

2007 2008 2009

US$/t

on

Rebars US$/ton East Asia Import Rebars US$/ton Europe DomesticRebars US$/ton N. America Domestic Rebars US$/ton Middle East Import

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200

400

600

800

1,000

1,200

1,400


2007 2008 2009

US$/t

on

HRC US$/ton East Asia Import HRC US$/ton Europe ImportHRC US$/ton Middle East Import HRC US$/ton China Export



Chart 19: Scrap to Rebars Price Ratio

Source: MEPS, Steel on the Net and Global Research

Room for World Consolidations

As of September 2007, the major 15 steel players in the world had a combined production of 449mn tons, representing around 36% of the world steel output in 2006. The top producer was ArcelorMittal, capturing the lion’s share of the world production, represented by 10% approximately, which is equivalent to 118mn tons. As for the rest of the world, output reached around 794mn tons, implying a share of 64% of the global steel output. The modest contribution of the top steel producer and the huge share of the remaining players, after excluding the major ones, reflect that the steel sector is still fragmented, and thus is poised for future consolidations. However, we expect that the movement towards consolidations will take place once the global economy strengthens and financial conditions stabilize. Only then producers possessing cash will expand their operations to increase their market shares regionally and internationally.

Chart 20: Top Global Steel Producers-September 2007


Rest of the World63.9%

Arcelor Mittal, 9.5% Nippon, 2.7%JFE, 2.6%POSCO, 2.5%USS (incl. Stelco), 2.1%

Baosteel, 2.1%Tata (incl. Corus), 1.9%

Anben, 1.9%Shandong, 1.8%

Nucor, 1.6%Wuhan, 1.5%

Evraz, 1.5%Tangshan, 1.5%

Severstal, 1.4%Riva, 1.4%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

2007 2008 2009


�� Egypt Steel Sector July 2009

Global Outlook for the Steel Industry

Even though the damage of the financial crisis to the global economy cannot be precisely measured at the moment, it is not expected to drastically affect demand for steel on the long run. However, the short run is a different story. Of late, demand has been virtually whipped out in both mature and immature markets, amid the global economic slowdown. Uncertainty about the future of the global economy has made investors reluctant to purchase steel products. Moreover, since most projects are financed through debt and the financial crisis has hit banks the hardest, liquidity has either become severely restricted or expensive, which places an enormous strain on the steel industry.

There are signs that the decline in steel production witnessed globally in 2008 might continue, as major production cut backs have been announced by global steel giants. Moreover, monthly Y-o-Y figures in 2009 show a drastic decline in output volumes across various regions, except for China, as investors are now extremely cautious and massive projects are being reconsidered.

The prospects of the industry will be largely affected by the automotive and construction sector, which are deemed to be the largest catalysts for the steel industry. In the U.S, Europe and Japan, automobile sales will decline as these regions are hit hard by the financial crisis. In addition, major emerging markets such as China, India and Russia, are expected to drive growth in the automotive industry. On the other hand, rising unemployment and generally tough macroeconomic conditions might cause a decline in the construction sector in the US. The story is a little bit different in emerging markets, where the sector is expected to grow in some regions due to a massive supply-demand gap.

In the EU, all steel using sectors are expected to witness harsh declines in 2009, with the automotive sector to be hit the most, as it is expected to fall by more than 15%, the tubes manufacturing follows, with a forecasted decline ranging from 10% to 15%, and then the construction sector from 7.5% to 10%.

Table 01: EU Steel Market Development of Main Steel Using Sectors (% change Y-o-Y) Steel Using Sectors Estimate 2008 Forecast 2009

Automotive From 0.51% to 1.00% More than -15.01%

Tubes From -0.50% to -1.50% From -10.01% to -15.00%

Construction From 0.51% to 1.00% From -7.51% to -10.00%

White Goods From 1.01% to 1.50% From -5.51% to -7.50%

Metal Goods From 1.01% to 1.50% From -5.51% to -7.50%

Struct. Steelw. From -0.50% to -1.50% From -1.51% to -5.50%

Shipyards From 1.51% to 2.00% From -1.51% to -5.50%

Mech. Eng. From 2.51% to 3.00% From -1.51% to -5.50%Source: Eurometal/UNESID: Outlook on Economies and Steel Markets, December 2008

Thus, it is expected that 2009 will witness global contraction, especially in the first half of the year in the mature and developed markets in Europe and the US. The situation is expected to improve in the second half as major stimulus packages around the world have targeted massive infrastructural projects, which should help ease the pressure on the steel industry. Moreover, China is still expected to spend large amounts of money on infrastructural development in



2009, and demand for steel in other members of the BRIC countries is still likely to continue. Also, petro-dollar fueled economies in the Middle East are still expected to have demand for steel, as many of these countries, buoyed by previous oil revenues, try to establish economies with less dependency on oil and are investing considerably on infrastructural projects.

While growth in the short-term seems to be impossible, as world demand is expected to decline by around 15%, on the long run the steel industry will pick up where it left off and resume growth. Accordingly, we expect steel consumption to witness a modest rebound of about 2.5% percent in 2010, on the back of an expected amelioration in the global economy, and consequently the sector’s performance. Afterwards, demand is expected to accelerate at a CAGR of 6 percent between 2011 and 2013. As for production, it will follow the consumption trend, as operating rates are expected to fall in 2009, and then to start increasing at declining rates starting from 2010.



MENA Region

Sector Overview

The steel sector in the Middle East and North Africa (MENA) region has witnessed major transformations over the past years, as Arabian countries try to emerge from the shadows of the developed world and become more industry oriented. In the early seventies, the industry was highly underdeveloped, as total steel production in the MENA region amounted to 1.1mn tons, while total steel imports were 3.1mn tons. The gap between production and imports, almost three folds, magnified the obvious underdevelopment of the industry within the region and represented an opportunity for growth. In 1971, there were only 24 mills distributed over 12 countries, while the bulk of total production came from Egypt, Algeria, Tunisia and Lebanon. Moreover, around 95% of total production was concentrated on long products, as most of the demand on steel came from infrastructural and housing projects. During the eighties, Arab Gulf States, buoyed by mammoth oil and gas revenues, took a great interest in the industry, as these economies tried to decrease their dependency on oil. The interest of the Gulf States in developing the steel sector reflects a more industry oriented approach adopted by these states to help develop their economies, which was one of the pivotal changes that occurred in the steel industry during the past years. Today, one of the largest steel producing countries in the MENA region is Saudi Arabia.

Another key development that occurred in the industry in the eighties was the evolution of the product mix, as flat products production increased noticeably to meet both internal and external demand. The major flat steel producers in the MENA region today are Egypt, Saudi Arabia, Algeria and Libya.

Perhaps the most fundamental and game changing development that occurred in the industry within the MENA region, especially during the nineties, was the entry of the private sector. Prior to the nineties, the steel industry was dominated by governmental institutions, as massive amounts of capital required and the strategic nature of steel as a commodity made it difficult for private investors to enter this sector.

However, economic reform programs in North Africa and massive oil revenues in the Gulf enabled private investors in the region to invest billions of dollars into the sector, to capitalize on the obvious gap between supply and demand. Perhaps the most noticeable impact that the private sector has had on the steel sector in the region is Ezz Steel’s acquisition over Alexandria National Company for Iron and Steel (ANSDK) in Egypt, where the once state owned steel giant has now become one of the largest and most efficient steel companies in the MENA region.

The entry of the private sector into the industry gradually shifted the focus of steel companies from creating profitability in the social sense to economic profitability. This shift in objective, coupled with major technological advancements, resulted in the reduction of the role of labor in the industry. Moreover, competition between producers substantially increased to meet the ever growing demand for steel and establish dominating market shares. Today, companies referred to as “Dominating” make up the biggest part of local production, as these companies command relatively large market shares in their respective countries. Ezz Steel, the Saudi SABIC’s Hadeed Company, Qatar Steel and Libya Iron and Steel are among the region’s



major producers. The presence of market moguls is not exclusive to companies in the MENA region, rather it is a trend that exists globally.

Over the past couple of years, the steel industry worldwide has been experiencing stunning growth, as emerging economies in Asia, Eastern Europe and the Middle East have flourished to become major players in the steel market. The real estate sector has been at the heart of the demand, as this sector witnessed tremendous activity, accelerated by the presence of overwhelming demand and access to finance. Consequently, steel companies in the MENA region entered 2008 strongly, pushed by their momentum and massive profits achieved in the previous year. In 2007, Egypt and Saudi Arabia ranked 27th and 35th, respectively, among the world’s steel producing countries. These positions reflect the substantial improvements that both countries underwent over the years to enhance their steel making capabilities.

One noticeable trend that has been strengthening in the MENA steel sector over the past couple of years is the mergers and acquisitions trend. In 2007, two major acquisition deals took place, as Kandil Company in Egypt acquired Galva Metal, while the Saudi “Universal Metal Coating Co. Ltd (UNICOL)” acquired its rival in the local market “Sidq Company”. These acquisitions will open the door for further transactions in the future that will produce synergies and enable steel producers in the region to become international players.

Consumption

The massive growth in the real estate sector and a desire of MENA economies to become more industry oriented accelerated steel consumption in the region. The booming real estate sector could be singled out as the main driver behind consumption growth, as favorable demographics and increased access to finance have created demand for new and more modern housing.

The Gulf States have been the main consumers of steel, as these states have been undergoing immense infrastructural and housing projects and have been setting the standards in terms of size and quality. A review of the per capita consumption figures in 2007 shows that the member countries of the Gulf Cooperation Council (GCC) had some of the highest figures in the world. The average per capita consumption in the region was 645 kg, a massive figure when compared to a world average of 194 kg and a Chinese average of 307 kg in the same year. The United Arab Emirates (UAE) had the highest per capita, as it averaged 2,342 kg. The stunningly large figure could be attributed to the sheer size of the projects that were implemented in UAE relative to its population. Nevertheless, the global financial crisis had its effect on the real estate sector and consequently, the steel sector, especially in the UAE. It is worth mentioning that per capita consumption in Egypt reached 69 kg in 2007.

Table 02: GCC per Capita Consumption - 2007Country Consumption (mn tons) Per-capita (kg)

Saudi Arabia 10.2 412

Kuwait 1.5 432

Qatar 1.4 985

Bahrain 0.3 373

Oman 0.7 248

UAE 10.0 2,342

GCC 24.1 645Source: Metal Bulletin, Global Research



Production

Steel production in the MENA region has been steadily increasing over the past two decades to meet the Arab countries ever growing demand for steel. In 1990, total steel production in the Arab countries amounted to approximately 4mn tons. However, as time passed by, the benefits of economic reform programs adopted generally by economies throughout the region and massive oil revenues in the Gulf created an enormous demand for steel products. Consequently, steel producers in the region scrambled to meet this demand by raising production capacities and efficiencies. In 2008, steel produced by Arab countries in the Middle East and North Africa amounted to 15mn tons, reflecting a CAGR of 4.8% since 1991. Even though total production in 2008 was lower than that achieved in 2007, the overall trend in steel production in the region is an increasing one, as the surge in production in 2007, which reached 15.5mn tons, was an abnormal one, due to overwhelming boom in the construction sector.

Chart 21: Steel Production in the MENA region (1991-2008)


The largest steel producing countries in the MENA region in 2008 were Egypt, Saudi Arabia, Qatar and Libya, respectively. The combined production of these four countries amassed to 13.4mn, representing a massive 88.4% of overall steel production in the region. Egypt led the way with 6.20mn tons in 2008, reflecting a 0.4% decline compared to 2007, when it produced 6.22mn tons. Saudi Arabia and Qatar were able to raise their outputs in 2008, as Saudi Arabia produced 4.7mn tons, reflecting a modest 0.5% Y-o-Y increase, while Qatar produced 1.4mn tons, recording a stunning Y-o-Y increase of about 22.6%. On the other hand, Libya’s output level was badly hit by the financial crisis, as production dipped by 9.0%, compared to the previous year and reached 1.1mn tons.

Chart 22: Top Steel Producing Countries in MENA region (2007/08)

* Other Arab countries include Jordan, Syria, Kuwait, Emirates, Sultanate of Oman, Yemen, Sudan and TunisiaSource: World Steel Association

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2,000

4,000

6,000

8,000

10,000

12,000

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16,000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Thou

sand

tons

Egypt Libya Algeria Tunisia Morocco Jordan Qatar Saudi Arabia Syria United Arab Emirates

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7,000

Egypt KSA Qatar Libya Morocco Algeria Other*

Thou

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2007 2008


July 2009 Egypt Steel Sector �9

In 2008, steel production in the MENA region followed a trend similar to the global steel production. At the beginning of the year, production levels were high, driven by strong performances in 2007 and major infrastructural and housing projects underway in various parts of the region. However, as the second half of 2008 approached and the global financial turmoil started to intensify, production levels decreased noticeably from their highs in March and May. Moreover, as liquidity dried, projects cancelations and delays halted steel production in many countries. Another factor that contributed immensely to the decline of production was that some of the economies in the region were dependant on a real estate boom, such as Dubai. And so, when the financial crisis deepened, a collapse in the real estate market ensued, putting pressure on the steel industry. In December 2008, monthly production in the region plummeted to reach 804,000 tons, down from 1.4mn tons in March, a substantial decrease of around 43%.

Chart 23: MENA Monthly Steel Production (2008/09)


When comparing the first five months of 2009 total steel production to the same period of 2008, we depict that the steel output dropped by 20.6%. Nevertheless, from January to May 2008 the steel production dropped by 1.0%, while from January to May 2009 the steel production recovered by a strong 26.4%, on the back of strong growth, encouraged by plummeting building materials prices.

Prices

Steel prices in the Middle East, and the rest of the world, have experienced tremendous volatility over the last couple of years. The demand shock on steel created by unprecedented demand from emerging countries in Asia, Eastern Europe and the MENA region caused steel prices worldwide to surge. A large portion of steel demand in the Middle East and North Africa is met through imports and so, their prices are in direct relation to changes in global steel prices. Since most projects undertaken in the GCC and North Africa are infrastructural and housing projects, they rely on steel rebars, which prices experienced massive increases, followed by sharp decreases. In November 2006, imported rebars in the Gulf States ranged between US$490-US$510/ton, however, as demand soared so did the prices of rebars and in July 2008 imported rebars in the Gulf were sold for as high as US$1,550/ton, representing a staggering 104% increase in less than two years. This tremendous surge in steel prices was halted in July 2008, as fears of a global recession grew. Hence less demand, coupled with massive losses in the global financial markets, drove investors away from the steel market and drastically reduced prices. In January 2009, imported rebar prices were being sold for as low as US$490/ton, wiping away the price increases of the last two years in just a couple of months.

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Chart 24: Rebars Steel Prices in the MENA Region

Source: Steel Business Briefing

In addition to long steel prices, flat products prices in the region have also witnessed high volatility. In June 2008, Hot Rolled Coils were imported to the region for US$1,220/ton, representing a 117% price spike, compared to August 2007. However, six months later in January 2009, HRC imports were being sold for US$400/ton, reflecting a 67.2% plunge.

Chart 25: HRC Middle East Import Prices

Source: Steel Business Briefing

Mega Projects

Despite an eminent global recession, demand on steel products in the MENA region remains strong, as severe housing shortages in North African Countries, and large announced projects in the Gulf help maintain the current appetite for development. The presence of these projects in the pipeline is expected to sustain a moderate growth in demand, assuming no new projects.

Table 03: Major Gulf Projects

Client/ developer Project name Country

Value

(US$bn) DescriptionConstruction Aldar Yas Island Ferrari Theme

Park

UAE 0.2 A Ferrari-themed race park, located near the

Al-Raha beach development and including a

full-size race trackAbu Dhabi Department

of Transport

Mafraq-Ghweifat Road

Development

UAE 0.9 327km-long motorway from Mafraq to

Ghweifat on the border with Saudi Arabia. The

motorway will include a series of interchanges,

including a major intersection at Ruwais

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200

400

600

800

1,000

1,200

1,400

1,600

1,800

Nov

Dec

Jan

Feb

Mar

Apr

May Jun Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May Jun Jul

Aug

Sep

Oct

Nov

Dec

Jan

2006 2007 2008 2009

US$/

ton

Rebars - CFR Gulf States Port US$/ton (Low) Rebars - CFR Gulf States Port US$/ton (High)

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1,400


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HRC US$/ton Middle East Import


July 2009 Egypt Steel Sector 2�

Emaar Burj Dubai UAE 0.9 The world’s tallest tower, 900 meters high,

with 170 to 200 floors and provision to increase

the height further in the futureEmirates Nuclear

Energy Corporation

Nuclear Power Plant UAE 0.5 Two 1,600MW nuclear power plants

Kingdom Holding Jeddah Mile High Tower Saudi Arabia 15.0 1,600-metre-high tower, part of a mixed-use

development covering 5.3 sq kmNakheel Tall Tower UAE 95.0 200-plus storey mixed-used tower on the

proposed Arabian Canal. The 1km-high

tower is expected to be the centrepiece of the

development, Nakheel Harbour and Tower,

covering 2.7kmQatar and Bahrain

Causeway Foundation

Qatar-Bahrain Causeway Qatar/

Bahrain

4.2 The causeway, also known as the Friendship

causeway, will connect the western coastal

region of Qatar to the south of Manama in

eastern BahrainQatari Diar Real Estate

Investment Company

Doha Convention Centre Qatar 0.6 400-metre-high tower with 104 storeys and a

built-up area of 180,000 square meters. It will

contain a hotel, apartments and retail unitsSagia Tabuk Economic City Saudi Arabia 3.0 Economic city in the northern town of Tabuk,

with the main purpose of attracting touristsSagia Ras al-Zour Resource City Saudi Arabia 25.0 Ras al-Zour Resource City will be developed in

the Eastern Province on the Gulf CoastPower and waterDubai Electricity

Water Company

P Station Phase 2 UAE NA 1,300-1,500MW and desalination capacity of

100-120 million g/dKuwait Electricity and

Water Ministry

Subiya Power Plant Kuwait 2.8 2,000MW plant

Kuwait Electricity and

Water Ministry

Al-Zour North Kuwait NA 3,000MW plant

Oman Power and

Water Procurement

Company

Salalah IWPP Oman 1.0 400MW of power and 15 million g/d

desalination capacity

Power and Water Utility

Company for Jubail and

Yanbu (Marafiq)

Yanbu IWPP Saudi Arabia 3.0 1,500-1,700MW heavy oil-fired power plant,

33 million g/d desalination capacity

National Water

Company

Riyadh Wastewater Plant

Privatisation

Saudi Arabia NA Sell-off of 1.1 million cubic meters of

wastewater treatment capacityOffice National de

l’Electricite

Safi IPP Morocco NA 1,320MW coal-fired plant

Qatar General Electricity

and Water Corporation

(Kahramaa)

Phase 9 Transmission

Project

Qatar 1.0 Construction of substations, overhead lines and

ground cables

Saline Water

Conversion Company

Yanbu 3 IWPP and

Privatisation of Yanbu 1,

Yanbu 2 and Yanbu RO

Plant

Saudi Arabia NA 1,600MW power; 88 million g/d of water

Saudi Electricity

Company

Rabigh IPP Saudi Arabia 3.0 1,200MW oil fired plant



Saudi Electricity

Company

Riyadh IPP (PP2) Saudi Arabia NA 2,000MW gas fired plant

TransportAbu Dhabi Airports

Company

Midfield Terminal

Complex

UAE 1.0 Expansion of the existing airport to increase

the handling capacity to 7.5 million passengers

a yearDubai Transport

Ministry

Red line, Dubai Metro UAE NA Dubai’s first metro line

GCC governments GCC Railway GCC NA 1,500km rail line linking all six GCC statesPublic Works Ministry Bubiyan Seaport, Phase

Two

Kuwait 6.6 Three design-and-build packages covering

dredging, quay wall construction and onshore

roads and pavingSaudi Railways

Organisation

Saudi Landbridge Saudi Arabia 5.0 Rail link joining the kingdom’s Gulf and Red

Sea coasts, via RiyadhSaudi Railways

Organisation

Mecca-Medina Rail Link Saudi Arabia 6.0 High-speed rail link between the holy cities and

JeddahSource: MEED; MEED Projects

Expansion Plans

The MENA region is considered to be among the top five locations in the world to establish a steel factory, due to a favorable environment and relatively cheap energy prices in the Gulf area. Therefore, several capacity expansions have been announced by major steel producers, to satisfy the region’s construction and infrastructure projects.

A Bahraini Company, Foulath, an affiliate of Gulf Investment Corporation plans to establish a joint venture company with JFE Steel of Japan to produce and sell pellets, in an investment that could reach up to US$700mn. The new venture, to be named Foulath-Oman, will have an annual production capacity of 7mn tons of pellets and will be located in the Salalah Free Zone in Oman. The Japanese steel company will own 40% of the venture and will buy 3.5mn tons per year for 20 years, while the remaining production will be marketed to DRI and other blast furnace plants located particularly in Asia and the Middle East. It is expected that the plant will be operational by 2011.

Among several steel projects currently underway in the United Arab Emirates is the Mussafah Steel Plant project, which is the largest and most noticeable. The plant is owned by Emirates Steel Industries (ESI) and will be executed on two phases, ending in mid-2011. The first phase of the project will entail the construction of a DRI plant with an annual capacity of 1.6mn tons. Moreover, a 150-ton EAF will be added, which will increase the crude steel making capacity of the plant to 1.4mn tons. The first phase has already been completed and production started in February 2009. As for the second phase of the project, the company will invest US$1.5 billion in a 1mn tons medium and heavy sections mill that will be used to supply billets for long products production and is expected to come online by mid-2011.

In Oman, two massive projects have been announced that will transform the sultanate to a major player in the MENA region steel sector. The first project will be conducted by Sohar Industrial Port Company and will entail the establishment of a 7.5mn tons iron ore pellet plant in Sohar, at an estimated US$1bn. The second project will be carried out by Shadeed



Iron and Steel, a major player in the Omani steel industry, and will involve the creation of 1.5mn tons plant to produce steel billets. The project was scheduled to start operations in the third quarter of 2008, however, due to the economic crisis and the consequent slump in the steel market, the opening of the plant has been pushed to 2009. Moreover, the company had planned to expand its steel making capacity by 1mn tons, but all expansion plans have been delayed, due to concerns of decreasing demand.

In Saudi Arabia, Al Tuwairqi Group will invest about US$800mn to increase its melt shop capacity by 2mn tons, to reach 3mn tons by 2010. This will be done by adding two 130-ton EAFs at a facility located near the company’s existing plant in Dammam, Saudi Arabia. In addition, Al Rajhi Steel Industries is aiming to increase its capacity by 2012, via a US$1.0bn investment. This will be done through two stages a 1mn tons rebars plant, which is expected to be operational by 2011 and a 1.8mn tons DRI plant, to be operational in 2012.

In Egypt, several capacity expansions have been announced, as the Industrial Development Authority (IDA) has awarded four local producers licenses to expand their current operations. Moreover, the IDA has also awarded regional and international firms licenses to establish new plants in Egypt. The most noticeable of announced projects is that of ArcelorMittal. The company, which is considered to be the largest steel producer in the world, won a license, through a bid, to establish 2 factories for producing 1.6mn tons of DRI and 1.4mn tons of billets, annually. The license cost reached LE340mn and the investment cost of the plants’ construction was expected to range between US$800mn and US$1bn. Moreover, the Kharafi Group won a bid on a license, at a cost of LE108mn, to construct a steel plant, with an expected annual capacity of 6mn tons of pellets. It is worth mentioning that the Kuwaiti Company was granted a second license for pellets production in January 2009, with an investment cost amounting to LE800mn and an expected annual capacity of 6mn tons.

Egyptian steel powerhouse Ezz Steel announced that it will construct a new Greenfield steel plant, its first outside Egypt. The plant will be built in two phases and is expected to have an annual capacity of 3.2mn tons of DRI and 3mn tons of long products. The decision of expanding in Algeria came on the back of the booming construction sector, the ample gas reserves and the growing population in the Country, in addition to the shortage of long products, amounting to 3mn tons.


2� Egypt Steel Sector July 2009

Table 04: Major Expansion plans in the MENA Region

Company Capacity Country

Investment

Cost

Completion

Date

ESI-Mussafah Steel Plant 1.6mn tons of DRI

1.4mn tons from meltshop

1.1mn tons from 2 rolling mills

UAE US$1.2bn 2009

ESI-Mussafah Steel Plant (Phase 2) 1.1mn tons of medium and heavy

sections

UAE US$1.5bn 2011

Al Tuwairqi Group 3mn tons from meltshop Saudi Arabia US$800mn 2010

Al Rajhi Steel Industries 1mn tons of rebars

1.8mn tons of DRI

Saudi Arabia US$1.1bn 2011

2012

Sohar Industrial Port Company 7.5mn tons iron ore pellet Oman US$1bn 2010

Shadeed Iron and Steel 1.5mn tons of steel billets Oman US$750mn 2009

GIC and JFE Steel 7mn tons of pellets Oman US$700mn 2011

Arcelor Mittal 1.6mn tons of DRI

1.4mn tons of billets

Egypt US$1bn N/A

Al Kharafi Group

(2nd License)

6mn tons of steel pellets

6mn tons of steel pellets

Egypt N/A

US$800mn

N/A

Suez Steel Co, Ataka 2mn tons of DRI Egypt €550mn Delayed

Ezz Flat Steel 1.65mn tons of DRI Egypt US$400mn 2011

Ezz Flat Steel Billet Caster Egypt US$75mn 2010

Egyptian Sponge Iron and Steel

Company (ESISCO)

1.76mn tons of DRI Egypt N/A 2010

Ezz Steel 3.2mn tons of DRI

3mn tons of long products

Algeria US$2bn Pending

Source: Zawya, Steel Business Briefing, Metal Bulletin, Global Research

Major Threats to the Region

Even though steel production surrounding the MENA region has been growing steadily over the past years, demand has been much higher and as a result, the region was considered one of the major importing markets in the world, giving steel a high position in terms of value compared to other imported products in the region. It is worthy to note that the United Arab Emirates was ranked among the world’s largest importing countries.

The two largest producers in the MENA region are Turkey and Iran, ranked as the 11th and 20th producers among the globe in 2007, respectively. Egypt followed, as it was ranked the 27th producer in the world in the same year. Actually, the main supplier to the region is Turkey, along with the Commonwealth of Independent states and a few North African countries. In the mean time, Turkey is deemed to be the main threat to the steel industry in the region. This stems from the oversupply of steel that is directed to exports, mainly to the Arab countries.

As for Iran, it does not currently represent a threat, though it is the second producer of steel in the region, as it is a net importer of steel. In 2008, consumption reached 15.6mn tons, whereas production amounted to 10mn tons, with the remaining being fulfilled through imports. In an attempt to reduce the Country’s reliance on imports, a new steel plant is currently under establishment, with the aim of producing 1.65mn tons of sponge iron annually, along with 1.5mn tons of a specific kind of steel. The project is expected to be completed by September 2009.



Chart 26: Turkey Production & Consumption of Steel Chart 27: Iran Production & Consumption of Steel


As for Turkey, the country had a per capita consumption of steel of around 315kg in 2007, a high figure compared to the Middle East average of 286 kg in the same year. This explains the fact that Turkey is the major supplier of steel to the region.

On the back of the financial crisis that hit the construction sector globally in 2008, the gap between supply and demand of steel in Turkey widened to reach 5.1mn tons of steel available for exports, compared to 2.2mn tons in 2007. As China’s demand for steel shrank at the beginning of the crisis, large amounts of Turkish steel were directed to the Arab region, particularly to UAE and Egypt. This was accompanied by a harsh devaluation of the Turkish currency, leading its steel prices to lower levels than those of local prices in UAE and Egypt. High demand in Egypt, resulting from the sound construction sector, which remained somehow stable, helped absorbing oversupply of Turkey. This was illustrated by the fact that Egypt was ranked the first Arab importing country from Turkey, surpassing UAE, over the four months period ending April 2009. It is worth mentioning that Turkey’s steel exports to the Arab region over the period rose by 45% Y-o-Y. In the mean time, Egypt’s imports reached 1.7mn tons in the four months period, up from 58 thousand tons imported in the same period of the previous year. As domestic prices in Egypt were higher than Turkish prices, this resulted in temporary shutdowns of some domestic plants. Nevertheless, competition among local Egyptian players and fears from further dumping activities, in addition to lower demand in the market resulting from large stocks of steel, contributed to lowering local prices. In the mean time, slowing construction activity and large reserves of steel in UAE resulted simultaneously in lowering domestic prices.

If dumping activities by Turkey continue to take place, this could hinder the growth of the steel sector in the region, especially with the expansion plans that are expected to be completed in the foreseeable future.

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Outlook

After the heydays the region enjoyed over the last couple of years in the construction sector, on the back of substantial oil revenues and the resulting liquidity, along with the aim of reducing dependency on oil, the world financial crisis negatively affected the construction sector in the region, and the steel industry was negatively affected accordingly.

As of November 2008, projects worth around US$4 trillion were under progress in the region, of which projects valued at US$3 trillion approximately were directed to the Gulf countries, especially in KSA and UAE. The fate of these projects is unknown, as many of them have been put on hold, particularly in Dubai, due to tight access to credit.

Demand for steel in the Middle East is expected to shrink by around 9% in 2009. Nevertheless, we believe the region is less affected than other nations. The expected slump of 15% in the world’s consumption of steel supports our view. This can also be illustrated by the expected economic growth, as the emerging and developing countries have an expected GDP growth of 1.6% in 2009, compared to a negative world average of 1.3%. This ensures that developing countries, and accordingly the MENA region, will witness a faster bounce once the prevailing conditions stabilize, which signifies positive prospects for the steel sector.

Though we believe demand will plummet in 2009, as a consequence of the global turmoil, we expect better performance over the long term, starting from 2010, as the crisis effects begin to contract and better economic developments would take place. Therefore, we forecast growth of steel consumption to rebound, increasing at a rate ranging from 6 to 9 percent, and then to accelerate at a rate of 5 to 6 percent until 2013. Production rates will follow demand development, declining in 2009 and then bouncing back starting from 2010.

This will be supported by the construction and infrastructure projects that are still under implementation, especially in countries like KSA and Egypt, which governments announced stimulus packages that will mainly focus on infrastructure spending. In KSA, US$400bn are planned to be spent over a 5-year period, whereas in Egypt, the government announced spending plans amounting to LE30bn. In addition, it was announced in KSA that there is a need for 1mn new homes over the 5-period period ending 2014, to satisfy mounting population.



The Egyptian Steel Sector

Overview

Despite the negative economic conditions that prevailed in the international markets in 2008, Egypt was able to realize an enormous 6.8% growth in its industrial production over the year. That is why the Country was ranked third after Brazil and China, which growth reached 9.8% and 8.2%, respectively. Switzerland and South Korea followed, with an annual growth rate of 6.1% each.

The Egyptian steel industry represents one of the cornerstones of Egypt’s economic growth and development, due to its linkages to almost all other industries that stimulate economic expansion. Industries such as construction, housing, infrastructure, consumer goods and automotive, all rely heavily on the steel industry and so, the importance and development of the steel sector is imperative for the progress of the Egyptian economy in general.

Evolution of the industry

The first fully integrated public steel company in Egypt was the Egyptian Iron and Steel Company that was founded in 1954. The company was a perfect example of state involvement in the steel sector in particular and in the economy in general. Egyptian Iron and steel produced both long products and flat products and was the main market player for several years. Until the nineties, the steel sector was controlled by the public sector, a theme that was recurrent throughout the Middle East and North Africa in general, and focused on generating profitably in the social sense, while economic profitability was secondary. However, in the nineties, the situation changed dramatically, as the private sector was finally granted access to the industry. The entry of the private sector into the steel industry was symbolic to a decade, which witnessed the beginning of economic reforms vision adopted by many nations throughout the MENA region. Moreover, profitability in the social sense vanished, as private investor pumped billions of pounds to revolutionize the sector, using sophisticated technologies and expected to earn large profits in return. Even though the introduction of new technologies massively enhanced and developed the steel sector in Egypt, it also impacted employment within the sector, as less workers and more sophisticated technicians are now required by the steel companies.

Period of exceptional performances

Over the past four years, the Egyptian steel sector has been enjoying one of its most successful periods, as the stunning boom witnessed in the real estate and construction sectors has elevated the industry to new highs and profit records. Since the FY2005/06, the construction sector kept growing at an average rate of 15% annually. Regardless of the plunge witnessed in the world construction sector, the sector in Egypt is highly performing, as it grew by 12% over the period from July to March 2008/09, compared to the same period of the last year. In the mean time, the real estate sector in Egypt recorded a growth of 4% annually starting from 2005/06 until 2007/08. Also, the sector inclined by 4% over the 9- month period ending March 2009, as opposed to the same period a year earlier, despite the world financial crisis.

The tremendous demand–supply gap within the housing sector, coupled with a wave of optimism following the economic reforms adopted by the government since 2004, and the



flourishing real estate and construction sectors, caused steel producers to intensify their production levels in order to meet the massive local consumption.

Chart 28: Booming Construction and Real Estate Sectors

Source: Central Bank of Egypt and Global Research

Moreover, the government has been trying extensively to create a favorable environment to ensure that local steel demand is met. In 2000, the government was very supportive to local producers and took strong actions against dumping by foreign suppliers by raising import taxes. However, during the past couple of years the stunning volatility of steel prices has created a sense of mistrust between consumers and local steel producers. This led the government to reduce tariffs on imported steel to help curb local steel prices. Moreover, the financial crisis that unraveled during the second half of 2008 has created concerns over economic development, which has consequently cast doubts over the future of the steel industry in the short term.

Market Players

The steel sector in Egypt constitutes of 27 producers, with an annual capacity of 5.5mn tons of long products and 2.7mn tons of flat products. Since most of the demand on steel in Egypt comes from infrastructural and housing projects, the majority of the production is dedicated to long products.

Table 05: Major Steel Companies in Egypt-2008

Company NameCapacity

(Thousand tons) Products

Al Ezz Steel Rebars 1,000 Long

Al Ezz Dekheila Steel Company 2,900 Long and Flat

Al Ezz Flat Steel 1,000 Flat

Al Ezz Rolling Mills 400 Long

Delta Steel Mill 85 Wire Mesh

Egyptian Iron and Steel Co. HADISOLB 1,000 Long and Flat

Beshay Steel 2,000 Rebars and Wire Rods

Kandil Steel 1,000 Long and Flat

Kouta Steel Group 360 Long

Misr National Steel Company (Attal) 360 Long

National Port Said Steel 400 Long

Suez Steel Company 500 BilletsSource: Zawya, Companies’ Websites, Global Research

(10,000)

-

10,000

20,000

30,000

40,000

2004

/05

2005

/06

2006

/07

2007

/08

Jul-M

ar 20

07/08

Jul-M

ar 20

08/09

LE m

n

-4%

1%

6%

11%

16%

21%

Construction Real Estate Construction Growth Real Estate growth



It is worth mentioning that of the local players, Al Ezz steel Rebars “Ezz Steel” commands the lion’s share in the market, as the company constituted about 62% of the long products consumption in 2008. Beshay followed with a share of 12.5%, while Misr National Steel, formerly known as Al Attal Steel, came third with a share of 5.5%.

2008 Market SharesChart 29: Long Products Chart 30: Flat Products

Sources: Ezz Steel 2008 Presentation and Global Research

As for the flat steel consumption, Ezz Steel again dominated the market in 2008, with a market share of about 58%. Egyptian Iron and Steel Company came second with 23% of the market, while the remaining consumption was satisfied through imports.

Oligopoly rather than a monopoly

Due to the large market share that Ezz Steel commands in the Egyptian market, several monopoly accusations have been directed to the steel making mogul. The Company has been accused by many in the media of performing monopolistic activities, particularly price distortions. Moreover, the involvement of the owner of the company, Engineer Ahmed Ezz, in politics has raised even further questions as to whether the government has always sided with the steel producers and maintained the status quo. Ahmed Ezz is a member of the National Democratic Party and head of the Planning and Budget Committee in the Egyptian Parliament.

Certain ratios clearly indicate that the market is highly concentrated and that a small number of steel producers have tremendous influence on the market, and in turn on prices. Three local players capture a combined market share of around 80% of long products, the main steel type used in Egypt, implying a highly concentrated industry. However, this high ratio doesn’t necessarily mean that the steel industry in Egypt is a monopoly, rather an oligopoly. There are two types of oligopolies, one where there are several dominating players in the market who agree together on prices and another where there is a dominant producer among other powerful producers. The latter is closest to the current situation of the steel market in Egypt, as there is a dominant producer in the form of Ezz Steel, but there are also powerful producers such as Beshay and Misr National Steel. Due to the high level of concentration within the industry and the dearth of alternative products to rebars in the construction industry in Egypt, buyers have low bargaining power, while sellers have high tremendous influence over the prices of steel. In addition, the steel industry is a capital intensive industry, which means that barriers of entry are high. Moreover, the dominant position of Ezz Steel, coupled with the fact that since 2000 steel capacities have exceeded consumption, discourages new investors to enter the sector, which further strengthens the position of the steel making cartel.

Ezz Steel62.4%

Al Attal5.5%

Beshay12.5%

Others14.4%

Bourieni2.7%

Makaby2.5%

Egyptian Iron and Steel Company

23%

Ezz steel57%

Imports20%



The government attempted to curb the public anger generated by the actions of the major steel players by reducing import tariffs from 20% to 5% in 2003. However, as steel prices worldwide soared over the last couple of years, the prices of imported steel became expensive and so, buyers had to return to the still existing local cartel of steel producers.

In January 2009, the Egyptian Anti-Competitive Supervisory Body declared that it has found no evidence to prove that Ezz steel, or any other steel producer in Egypt, has violated any articles in the anti-monopoly law. Hence, no action by the government was taken against the steel producers. Furthermore, the Authority recommended the government to grant more licenses for integrated steel plants to reduce costs.

Consumption

The consumption of steel in Egypt has been steadily rising over the past four years, as massive infrastructural, housing and tourism projects were implemented to capitalize on the strong performance of the Egyptian economy and the subsequent increase in the population purchasing power. In 2004, total consumption amounted to only 3.4mn tons, as the real estate sector at that time was still in a slump. However, consumption started to gradually increase and in 2007, total consumption reached 5.2mn tons. This increase in consumption reflects a CAGR of 14.0% over the 3-year period. As described earlier, on a per capita basis, Egypt’s consumption is still low compared to some of its neighboring countries in the MENA region and the world in general. Egypt’s per capita consumption of steel in 2007 was about 69.2 kg, which was above the African average of 35.8 kg, but way below the Middle East average of 285.6 kg and the global average of 194.2 kg. The reason for this large discrepancy could be attributed to the large population that Egypt poses, 81.7mn, and reflects the potential of the Egyptian market, as there is still a huge appetite for growth and development.

Chart 31: Steel Consumption in Egypt (1998-2008)

Source: Ezz Steel 2008 Presentation

Despite the financial crisis and its implications on various sectors, including steel, consumption grew at 15.3% Y-o-Y in 2008, and reached 6.0 tons, up from 5.2mn tons in 2007. This came on the back of the robust construction sector, the growing Egyptian population and consequently the rising needs for housing units.

3,55

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Production

Steel production in Egypt has been on the rise over the past decade, as producers scrambled to meet the ever growing demand created by the real estate boom. The rise in production took off in 2000, as the industry cycle bottomed out and the fruits of previous economic reform agendas in the mid-90s were being reaped. Since 2000, steel production in Egypt increased at a CAGR of 10.3%, to reach 6.2mn tons in 2008. Most of the production went to long products that are used in the construction industry, namely rebars. As mentioned earlier, Egypt ranked 27th among steel producers worldwide and 3rd in the region behind Turkey and Iran.

Chart 32: Steel Production in Egypt (2000-2008)


In 2008, apart from a severe drop in production in July, steel production in Egypt followed the same trend that occurred worldwide. The industry entered the year strongly, driven by strong performances in the previous years and a mass sense of optimism and belief in economic development. Monthly production levels were high during the first half of the year, peaking on March to record 584 thousand tons. However, the industry took a hard hit during the second half of the year, due to the financial crisis, and production levels dropped drastically, which was reflected in December’s output of only 380 thousand tons. As mentioned earlier, total steel production in Egypt in 2008 amounted to 6.20mn tons, representing a 0.4% drop compared to the previous year, where total production reached 6.22mn tons.

Chart 33: Monthly Steel Production in Egypt and the World


However, with the beginning of 2009, monthly production started to rise, in response to the healthy local construction sector. Steel output in May 2009 reached 453 thousand tons, rising by 19.2% compared to December 2008. Nevertheless, the influence of the world financial crisis is illustrated in the 22.4% drop in steel production in the first five months of 2009, as opposed to that of the same period in 2008, before the crisis took place.

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3.804.32 4.40

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Imports and Exports

One of the main and persistent criticisms that has always been directed to the steel making industry in Egypt, is that even though the industry has sufficient and adequate finishing facilities, it lacks intermediate capabilities. As a result, Egypt is a net importer of steel making raw material, namely iron ore and scrap in addition to billets. The main reason for this is that iron ore in Egypt has an iron concentration of 53%, while the industry requires, at least, an iron concentration of 73% to produce steel with an acceptable quality.

The surge of demand for steel products in the last four years amplified the problem, as producers were forced to import large amounts of steel making raw materials, during a period where the prices of raw materials were at all time highs. As a result, the value of imported steel making inputs surged between the period from 2004 and 2008. In June 2004, the value of imported steel was US$787.7mn, however, this figure increased rapidly and reached US$4,008.7mn in June 2008, representing a 50.2% CAGR over the 4-year period, and in the mean time a Y-o-Y increase of 110.5% over 2007. During the 9-month period of the fiscal year 2008/09, Egypt’s imports of steel reached US$3,302.0mn, which represents an increase of about 28.7%, compared to the same period during the previous year, where total imports amounted to US$2,564.9mn. Egypt imports of steel has been consistently rising lately, mainly because of the lower prices of imported steel compared to the domestic prices of the market, which were initially high because of the escalating demand, on the back of a growing construction sector. This induced Turkish exporters to dump the Egyptian market with their products, especially after their currency was depreciated. This in turn made the import prices, particularly from Turkey, more attractive and resulted in the huge escalation of imports lately.

Chart 34: Egypt Steel Exports and Imports

*ProvisionalSource: Central Bank of Egypt

On the other hand, since demand for steel products surged worldwide, before the financial crisis, so did Egypt’s iron and steel products exports, particularly flat steel. As a result, the value of Egypt’s exports of steel products increased from US$542.2mn in June 2004 to reach a provisional amount of US$1,519.6mn in June 2008. These figures indicate that exports increased at a CAGR of 29.4% over a four year period, which also implies that the quality of Egypt’s finished products has also improved. During the 9-month period ending March 2009, total steel exports were valued at US$926.4mn, which represents a decline of 15.7%, compared to the same period a year before, on the back of the fading demand following the current world recession.

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Prices

The prices of raw materials and semi-finished steel products, represented by scrap and billets, followed the same trend of international prices. In June 2008, when the construction sector in Egypt was still in its best performing stages, average prices of scrap and billets in the local market reached their maximum, as they amounted to LE3,761/ton and LE6,099/ton, respectively. After the crisis, prices plummeted considerably, as scrap prices reached LE1,493/ton by the end of the year, a 60.3% decline, compared to June 2008. Billets prices followed suite, plunging by 56.4%, to reach LE2,661/ton.

As the financial crisis is still prevailing worldwide, prices did not witness a rebound yet, although they are starting to incline. As of July 2009, average scrap and billets prices were LE1,534/ton and LE2,442/ton, respectively.

Chart 35: Average Prices of Scrap and Billets

Source: Industrial Development Authority

Since a large amount of steel making inputs are imported from foreign markets, the price of finished steel products in the local market is directly affected by the developments in the global steel markets and in turn global steel prices. As the prices of steel worldwide skyrocketed over the past couple of years, so did the prices of steel in the local market.

Chart 36: Egypt Rebars Prices

Source: Central Bank of Egypt, local newspapers and Global Research

Prices of rebars in Egypt reached LE2,596/ton in January 2006. Since then, the prices have substantially increased and in August 2008 they reached an alarming LE6,630/ton, representing a massive 155.4% increase in less than three years. Afterwards, steel prices declined harshly on fears of a slowdown in the Egyptian economy, which was expected to

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affect the real estate market. Consequently, rebars prices fell sharply by around 43% and reached LE3,790/ton in December 2008. However, the cheap steel imports from Turkey increased competition among local producers, forcing some of them to lower their prices and others to temporarily shut down their mills. In March 2009, Ezz Steel lowered its ex-factory prices to LE3,150/ton after importers flooded the market with cheap steel worth LE3,100/ton. As of May 2009, prices were up again by an additional LE180, in response to higher construction activity. However, in July 2009, prices per ton went down to reach LE3,030, as a result of the increasing steel imports from Turkey.

Recent Developments

In August 2007, the government announced plans to gradually remove subsidies on energy prices for energy-intensive industries. The plan was to increase energy prices gradually over a three year period from US$1.25 to US$2.65 per Million British Thermal Unit (MBTU), which was the amount by which the government subsidized energy prices. However, in 2008, the government declared that the prices of natural gas used as fuel would rise from US$1.7 to US$3 per MBTU.

Moreover, as demand on steel products soared, producers opted to export their products to other markets to benefit from higher prices and achieve strong margins. This consequently led to a dearth of steel in the Egyptian market, which was one of the factors that contributed to the price increases. As a result, the government decided to intervene in February 2007 by imposing a fee of LE180 on each ton of exported steel. However, as the global financial turmoil spread and demand significantly dropped, the government decided to cancel the export fee in October 2008, in an attempt to stimulate exports and help support the industry.

It is worth mentioning that the government imposed in February 2009 a 10% tariff on some types of imported flat steel, in an attempt to protect the local market from dumping activities. A minimum charge of US$150/ton was imposed on imported cold rolled flat tin sheets, while a minimum charge of US$200 and US$250 was imposed on each ton of imported zinc-coated and plastic-coated sheets, respectively. Nevertheless, this decision was cancelled in April 2009, as the government perceived that the removal of such tariffs would encourage competition among local producers and will support exports of finished steel products that use these imports as raw materials.

Expansion plans

To help increase competition within the industry and help reduce steel prices in the local market, the government decided to offer new licenses to various investors to either create or expand steel production in Egypt.

By the end of 2007, four local producers were granted licenses to build new factories and expand their capacities after submitting successful bids. These four producers were Al Ezz Steel Rebars, Suez Steel, Egyptian Sponge Iron and Steel Company (ESISCO) and Tiba for Iron and Steel. It is worthy to note that only the licenses of Ezz Steel and ESISCO are expected to operate. Ezz Steel will add an additional DRI capacity of 1.65mn tons. In addition, it will establish a billet caster in its flat steel facility, providing flexibility to switch production between long and flat steel.



Moreover, the world’s largest steel producer ArcelorMittal has had a successful bid in 2008, to obtain a license to build two steel factories. It is believed that the license cost the steel making giant LE340, while the investment cost of the plants was expected to be within the range of US$800 to US$1bn. The capacity of the two new factories would be 1.6mn tons of DRI and 1.4mn tons of billets. Another foreign company that has successfully obtained a steel making license was Al Kharafi Group of Kuwait. The Kuwaiti company, which won a bid and got a license worth LE108mn, plans to establish a steel plant with an annual capacity of 6mn tons of pellets. Moreover, in January 2009, the Kuwaiti company obtained a second license to produce steel pellets in Egypt. The new project will cost around US$800mn and is expected to deliver an additional 6mn tons of steel pellets.

In July 2009, four companies submitted requests for licenses to establish new steel rebars plants. The Egyptian government announced that the approvals for these requests will depend on the availability of energy allocations for these new plants, especially that the government is not currently favoring the energy intensive industries, on the contrary the orientation is now towards labor intensive industries, in order to face the current challenges stemming from the international recession and its negative effects on the employment market.

Despite these announced new capacities, the majority of these projects are to face delays for lack of financing or lower investment costs under the current global economic situation.



Egypt Economy

The Egyptian economy continued its robust growth for the third consecutive year, achieving an average GDP growth rate of 7.1% over the past 3 years. The economic growth was broad-based including various sectors. The main sectors that have witnessed the highest growth rate in real terms over the past 3 years were construction 14.9%, Suez Canal 14.0%, tourism 13.7% and communication 12.9%. This healthy economic performance came on the back of the notable economic reform policies adopted by the government since 2004, as the government continuously presses on with legislative and administrative efforts to create better business environment.

Even under the current world recession and expectations of negative GDP growth mainly in the developed economies, Egypt succeeded to record a strong 4.7% growth in its GDP, between July and March 2008/09, compared to the same period of the previous year.

Chart 37: Real GDP growth

Source: Ministry of Economic Development, Central Bank of Egypt & Global Research

The government efforts placed Egypt for the third time in 4 years, among the top 10 global reformers and the top regional reformers this year in the “Doing Business 2009” report, which is compiled annually by the World Bank comparing the business environments in 181 economies worldwide. There have been improvements particularly in the areas of starting a business, dealing with construction permits, registering property, getting credit, protecting investors and trading across borders.

Chart 38: Total Implemented Investments

Source: Central Bank of Egypt & Global Research

34 34 31 36 34 42 50 49 58 65 41 52

30 31 32 32 34 3746 66

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95101

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20.6%19.6%20.8%

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Jul-Mar2008/09

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n

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Public Investment Private Investment Implemented invt./GDP

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This economic growth came on the back of growth in final consumption at a CAGR of 18.3%, which was mainly attributable to the growth in private consumption, over the period from 2004/05 to 2007/08. In addition to the huge investments undertaken by local and foreign investors in almost all the economic sectors, where total investments reached LE199.5bn, representing 22.3% of GDP and achieving a CAGR of 27.4% over the same period. Despite the world financial crisis, the total implemented investments reached LE152.4bn between July and March 2008/09, as opposed to LE136.0bn in the same period of 2007/08.

Moreover, Foreign Direct Investment (FDI) reached US$13.2bn in 2007/08, recording a remarkable CAGR of 50.5% over the past 3 years. It is worth mentioning that FDI represented 8.1% of GDP in 2007/08, compared to 8.5% in 2006/07.

Chart 39: Net FDI

Source: Ministry of Investment & Global Research

The United States and the European Union (EU) represent a major source of FDI, where they collectively account for around 65% of total FDI inflows to the Egyptian economy. When we look at the distribution of the total FDI inflows by country, we find that USA was the greatest contributor with a share of 36.1% in 2007/08, followed by EU with a share of 28.7%.

It is worth mentioning that FDI witnessed a sharp decline by 48.2% from US$7.8bn in H1 2007/08 to US$4.0bn in H1 2008/09, as the majority of FDI inflows were from USA and EU that have been severely hit by the world credit crunch.

Chart 40: FDI Total Inflows


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Furthermore, higher international food and energy prices in the international markets, as well as the hiking local consumption level resulted in soaring inflation rate, reaching a peak of 23.6% in August 2008, and higher cost of imports, which increased by 37.8% in 2007/08 over the previous year, in addition to higher exports proceeds, which increased by 33.3% in 2007/08. The increase in the cost of imports outweighed the growth in exports, leading to a 43.7% increase in the trade deficit in absolute value and as percent of GDP in 2007/08, reaching 14.5% compared to 12.7% in 2006/07.

Chart 41: Development of the Inflation Rate

Source: Central Bank of Egypt and the Central Agency for Public Mobilization and Statistics

On the other hand, the increase in net services by 30.2%, mainly on the back of the growth in receipts from Suez Canal and tourism, as well as the incline in transfers by 32.3%, compensated to some extent for the increase in trade deficit and resulted in a surplus of US$888mn in the current account balance in 2007/08. Nevertheless, the current account balance declined by 60.9%, compared to the previous year, and represented 0.6% of GDP.

Starting from the second half of 2008, the global financial crisis extended its shadows on the Egyptian economy, where GDP growth reached 4.7% during the 9-month period ending March 2009, compared to 7.0% in the same period of 2007/08. Although final consumption kept its momentum during the first three quarters of 2008/09, growing at 20.9%, total investments were severely hit, achieving a growth rate of 12.1%, relative to a growth of 30.4% in the same period of 2007/08.

The current account balance deficit reached US$3,430mn, representing 2.4% of GDP in the 9-month period ending March 2009, compared to a surplus of US$399mn, representing 0.3% of GDP in the same period of the previous year. This decline came on the back of deteriorating trade balance position, which deficit grew by 16.1%, in addition to a drop of 10.9% in net services, triggered by a 7.2% decline in receipts. It is worth mentioning that Suez Canal receipts shrank by 1.9%, as opposed to a growth of 22.8% in the same period of 2007/08. Also, tourism receipts declined by 3.6% compared to a growth of 32.9% in the same period of 2007/08. Investment income and other receipts dipped by 30.3% and 22.8%, respectively, whereas these receipts rose by 11.3% and 111.7% in the 9-month period ending March 2007/08.

Therefore, the Egyptian government has taken measures to limit the negative effects of the world financial crisis and spur economic growth including:

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1. Increasing the infrastructure investment budget,

2. Cancelling taxes on exports and increasing financial support to all exporting sectors benefiting from export support fund to 50%,

3. Postponing plans to cancel subsidies on electricity and natural gas for energy-intensive industries, like cement, steel, fertilizers and petrochemicals,

4. Refraining imports of finished goods and commodities that have local counterparts.

The inflation rate plummeted on the back of the drop in commodities prices internationally. The inflation eased to reach 9.9% in June 2009, down from 23.6% in August 2008.

We believe that trade deficit is not expected to worsen dramatically in 2009 as imports decline, as a result of relatively weaker domestic demand and plunging commodity prices, will to some extent offset the expected drop in the country’s exports. In addition, the current account deficit is expected to widen as a result of the declining tourism and Suez Canal revenues, as well as the remittances of the expatriate workers.

Moreover, the subsidy bill, which surged by almost 50% in 2007/08, is expected to witness a considerable decline as the oil prices dropped severely since June 2008 and the changes made by the Egyptian government to reduce energy subsidy during 2008 are not expected to reverse. This in turn will leave more room for the government to direct this saving in other areas that could bolster the economic growth.

Despite the challenges that currently face the Egyptian government to sustain the economic growth, the financial intermediation will not be hampered by the international credit crunch, supported by a strong banking sector with healthy balance sheets and low level of global financial integration, thanks to the government reforms. The Egyptian banking sector reforms were mainly attributed to strong supervision and regulation, elimination of nonperforming loans and unadventurous financing and investment practices.

In general, Egypt’s medium term outlook remains sound with an expected GDP growth of over 4% for 2008/09. We believe that the Egyptian economy is capable of surpassing the current storm that hit the world economy, thanks to the reforms implemented since 2004. Most likely, the government will work on further targeting inflation rate, maintaining economic growth and balance of payments stability, throughout 2009.

Construction Activity

The construction sector is considered one of the important sectors in the Egyptian economy, as it has been expanding remarkably at a CAGR of approximately 15% over the past 3 years and employs approximately 10% of the Egyptian work force. Another sector that is highly interrelated with the construction sector is the real estate sector, which achieved a CAGR of around 4% over the same period. Collectively, the two sectors contribution to GDP reached 7.4% in 2007/08, achieving a CAGR of 10% for the period from 2004/05 to 2007/08.



Chart 42: Construction vs. Real Estate Sector Macro Indicators


The high construction activity witnessed in all the economic sectors whether, residential, recreational, industrial or infrastructure over the recent past, created high demand on all building materials in the local market. This growth was mainly attributable to robust economic performance, as well as the large investments implemented by both the government sector in the field of social services and public utilities, and the private sector in all segments of the real estate sector including, housing, commercial, hospitality and industrial development projects.

According to building permits quarterly bulletin published by the Egyptian Cabinet Information and Decision Support Center (IDSC), the composite building and construction index in Egypt maintained its momentum in December 2008, increasing by 5.6% on Q-o-Q basis and 18.8% on Y-o-Y basis. The composite building and construction index recorded a healthy CAGR of 9.2% over the last 5 years.

Chart 43: Composite Building and Construction Index

Source: IDSC & Global Research.

Moreover, the total number of building permits kept its upside trend in December 2008, reaching 21,905 building permits. The overall building permits index achieved a growth rate of 9.4% in December 2008, compared to the previous quarter, and an impressive 77.6% over December 2007. This increase in issued building permits promises a positive outlook for the construction sector.

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Chart 44: Overall Building Permits Index

Source: IDSC & Global Research

It is worth mentioning that the construction activity does not include only the construction of different types of buildings, but also it includes all infrastructure developments, such as roads, electricity and water works. According to the latest data published by CAPMAS, the total value of executed construction work by the private sector in 2007 reached LE8.9bn, against a total value of LE10.6bn executed by the public sector in 2006/07.

Although the reporting periods for the private sector and the public sector do not match, we will add the two values up just to find out how the value of executed construction work is distributed among different economic sectors during the last available fiscal year.

Chart 45: Total Value of Executed Construction Work According to Economic Activity

Source: IDSC & Global Research

Residential buildings share of total value of executed construction works was only 17% and the remaining other types of buildings captured 31% of the total construction works, whereas the remaining 52% was spent on different infrastructure projects. This fact highlights the fact that the demand on building materials depends on the broad construction activity including building construction and infrastructure works.

Although the construction sector has been negatively affected during the 9-month period ending March 2009, achieving a growth rate of 11.6%, compared to 15.0% in the same period of 2007/08, the real estate sector was able to slightly improve its growth rate from 3.6% to 3.7%. This large decline in the construction sector growth came on the back of lower investments, as a result of the global financial crisis.

Therefore, the Egyptian government took some measures to stimulate the Egyptian economy, including the construction sector, by increasing the public infrastructure investment budget by LE15bn, in addition to the originally planned infrastructure investments of approximately

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LE418bn in electricity, water, sanitation, transportation and communication sectors throughout the sixth 5-year plan (2007/08-2011/12).

The sixth five year plan (2007/08-2011/12) placed an overall investment target of LE1,295bn, of which around LE670bn are planned to be spent on construction activity in general, which includes targeted investments of LE418bn in the infrastructure, LE132bn in construction and real estate, LE76bn in health and education and LE44bn in tourism.

Sixth 5-year Plan (2007/08 – 2011/12) Targeted Total InvestmentsChart 46: Distribution among Economic Sectors Chart 47: Distribution by Implementing Body

Source: Ministry of Economic Development & Global Research

The government 5-year plan set a target to encourage investment and prioritize development in Upper Egypt, within the context of the government’s local development of developing under-developed areas of Egypt. The plan included establishing a holding company for Upper Egypt to identify investment opportunities, providing investment incentives to encourage private sector investment, completing delivery of potable water, electricity and natural gas. The local development plan also included rural development, which included the establishment of 400 villages and reclamation of 1mn acre, as well as slum development project.

Moreover, the government announced that it will allocate another LE15bn to be invested in participation with the private sector in infrastructure and industrial development projects within the context of Public-Private Partnership (PPP) strategy, which proved to be a successful alternative to government, as it relieves some burden from the state’s spending budget, besides benefiting from the private sector technical know-how, as well as better offered services. During the period from 1998 to 2007, the private sector participation in PPP projects reached US$15.3bn in the Energy, Telecom and Transportation sectors.

Private Sector Participation in Infrastructure ProjectsChart 48: By Year Chart 49: By Sector

Source: PPI World Bank database & Global Research

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Given the current global economic recession resulting from the credit crunch, the government’s total targeted investments throughout the sixth 5-year development plan seem to be optimistic, as we believe that total planned investments should be adjusted downward because total implemented investments, including FDIs will be negatively affected at least during the next one to two years.

However, lower international commodities prices, including building materials, which came on the back of declining global demand, presented an opportunity for more infrastructure and building investments at lower cost, mainly in less developed countries with immense society development needs.

In addition, the government’s plan to boost investments in infrastructure, such as transportation and public utilities, as well as economic housing and industrial development projects, besides prioritizing the development of under-developed areas in Egypt will act as a cushion for the activity in the construction sector.

We, therefore, believe that the construction sector is expected to experience slower growth rate during the next one to two years, relative to the booming phase over the last 3 years, yet the decline in growth rate is not expected to be that severe, providing reasonable support for the building materials sector, including steel. In other words, the outlook of the local construction sector is to some extent promising, taking into consideration the concurrent global financial turmoil and liquidity squeeze.



SWOT Analysis for the Egyptian Steel Sector

Strengths

• Strong local demand, despite the world recession.• Below regional average per capita consumption of steel. • Availability of low cost labor.

Weaknesses

• Raw materials, in terms of iron ore, billets and scrap, are mostly imported.• High costs of energy (as an energy-intensive industry).

Opportunities

• High demographics.• Emergent construction sector.• Government stimulus package, mainly focusing on infrastructure.• Egypt geographical location.

Threats

• Slowing economic growth and effect on local consumption.• Effect of international recession on steel exports.• Dumping practices by other countries.• Further government intervention, in terms of energy prices.



Outlook

Since 2004, the Egyptian government initiated many economic reforms, which led to enhancements in various business sectors, among which was the construction sector, representing 4.4% of Egypt GDP in nominal terms, as of March 2009. The sector grew at a CAGR of 22% over the period from June 2005 to June 2008. Also, Egypt demographics were the main catalyst for the booming stage of the construction sector. In 2007, around 61% of the total population in Egypt was in the working age, which urged the need for more housing units, to satisfy the growing population, reaching an estimated figure of 81.7mn in July 2008.

Chart 50: Booming Construction and Building Sectors (GDP based on current prices)

Source: Central Bank of Egypt and Global Research

The successful performance of the construction sector in Egypt was reflected on the steel sector, which has been developing significantly over the same period, where consumption grew at a CAGR of 15.1%. As mentioned earlier, despite the prevailing financial crisis, steel demand in Egypt rose by 15.3% Y-o-Y in 2008, reaching 6.0mn tons.

The outlook for the steel sector in Egypt even on the short run is positive, unlike the perception for the global sector. This is due to many reasons, first of which is related to the 3.6% expected growth in the Egyptian GDP over 2009, outstripping the 1.6% growth expected for the emerging and developing countries, and the forecasted decline of 1.3% in world GDP. It is worthy to note that regardless of the incumbent world financial turmoil, GDP growth in Egypt surged by 4.3% in the third quarter of 2008/09, ending March 2009, triggered by the performance of the construction, telecommunications and the transportation sectors, revealing the promising growth for the steel sector in the foreseeable future, supported by sound construction activity and the high housing needs, which are estimated at 320,000 units yearly, in addition to the accumulated unsatisfied housing demand estimated at around 2.5mn units. The lower per capita consumption of steel in Egypt compared to the rest of the world averages also supports our view for the sector’s performance, as it indicates that there is room for growth and development.

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Chart 51: Egypt Per capita Consumption vs. the Rest of the World Averages in 2007


Though we expect stagnation in the steel sector in 2009, especially in the first half of the year, due to an expected decline in the export sales, on the back of the global financial crisis, we expect the demand for steel to remain strong in 2009, growing at around 15%, which is the same rate realized in 2008. As aforementioned, Egypt’s imports of steel over the first four months of 2009 reached 1.7mn tons, compared to 58 thousand tons imported in the same period of the previous year. In addition, sales of the major steel producers in Egypt rose by 116.7% Y-o-Y over the same period. Our perception for the sector’s performance is based on the aforementioned reasons along with the stimulus package announced by the Egyptian government, around LE30bn, which will mainly focus on infrastructure projects, in addition to the LE670bn, which were allocated for spending on construction in the government’s sixth five-year plan (2007/08-2011/12). Furthermore, steel consumption is expected to grow at almost the same rate in 2010, as the global crisis starts to ease. Afterwards, we believe the consumption would grow at a CAGR of 7% until 2013.

The main growth in the sector will stem from demand on long products, pushed by the robust construction sector and its expected growth in the years to come. On the other hand, the flat products, affected by the waning demand on automobiles and household appliances worldwide, are not expected to recover before mid 2010. It is worthy to note that the expected new steel capacities that are to come on stream by 2011 and 2012 are accounted for in our local market forecast, whereas other expansions that were announced to be delayed are not included in the forecasted period. Delays are expected for the lack of financing, as well as the expectations that the capital costs of establishing these new plants are going to go down.

On the other hand, we expect a decline in production, at a rate close to the rise in demand, as local producers cut their utilization rates since the beginning of 2009, as they forecasted lower demand. In addition, the depreciation of the Turkish currency and the flow of low priced imports in the country forced many producers to temporarily shut down their facilities, as their fixed costs exceeded the steel products prices. However, production is expected to prosper in the following two years, especially by 2011, when new capacities come on stream along with the expected rebound of demand for flat steel in the international markets. As for long products consumption, we expect that demand growth will stabilize at a rate of 2.5% starting from 2010.

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Al Ezz Steel Rebars Company (Ezz Steel)

Tickers:

ESRS.CA (Reuters)ESRS:EY (Bloomberg)AEZD:LSE Listing:

The Egyptian Exchange (EGX)The London Stock Exchange (FTSE)Fair Value:

LE21.4Current Market Price:

LE12.7 (As of July 26th, 2009)

Investment Summary

- Al Ezz Steel Rebars Company (Ezz Steel) <ESRS.CA> is deemed to be the dominant steel producer in Egypt. Ezz Steel is located in the industrial zone of El Sadat City and is 65% owned by Ezz Industries. The Company is believed to have a market share of over 55% of the total Egyptian capacity.

- Al Ezz Steel Rebars was founded in 1994 and had an initial capacity of 0.4mn tons of long steel products. Over the past 15 years, the Company continued to grow and acquire other companies, increasing its capacities to an estimated 5.3mn tons in 2008, consisting of 3.1mn tons of long products and 2.2mn tons of flat products.

- In February 2006, Ezz Steel issued 88mn shares, which were swapped with 4.0mn shares of EZDK, owned by other companies in the Group. The deal raised the Group’s capital in Ezz Steel and in the mean time raised the holdings of Ezz Steel in EZDK from 21.28% to 50.28%. This share was further raised in 2008 when Ezz Steel acquired an additional stake of 2.96%.

- Over the period from June to October 2006, Ezz Steel acquired the Group’s share in EFS, represented by 35%, bringing Ezz Steel share in EFS to 54.23%. This share was further raised to 75.15% in 2007.

- Through its three subsidiaries, Al Ezz Dekheila Steel Company – Alexandria (EZDK), Al Ezz Steel Mills (ESM) and Al Ezz Flat Steel (EFS), Ezz Steel produces both long and flat products. Long products are produced through both Ezz Steel Rebars ESR/ESM and EZDK, while flat products are produced by both EZDK and EFS.

- Over 2008, the Company reduced its consolidated production by 4.6% to 4.6mn tons, down from 4.8mn tons in 2007. The reduction was mainly in the flat steel output, which declined by 16.6%, from 1.7mn tons in 2007 to 1.4mn tons in 2008. The slump in flat production came primarily from the EFS facility, which output shrank by 203 thousand tons, representing a drop of 21.8% over the previous year, as the facility stopped operations for a major overhaul. Apparently this was due to the sluggish demand for flat

July, 2009

BUY



steel all over the globe, taking into consideration that the majority of flat steel is directed to exports. As for flat steel produced by EZDK, it fell by 10.3% in 2008.

- On the other hand, rebars production witnessed a slight increase of 1.9%, as it grew from 3.1mn tons in 2007 to 3.2mn tons in 2008. This was a result of the rise in the production of EZDK by 3.0%, as ESR/ESM production slightly rose by 0.4% Y-o-Y.

- Over 2008, the consolidated sales of the Company reached 4.6mn tons, down from 4.9mn tons sold the previous year, a drop of 5.2%. This was a result of the plunge of the exported quantities by 28.9%, from 1,289 thousand tons to 916 thousand tons, which was mainly due to the 93.9% slump in exported volumes of rebars, from 294 thousand tons in 2007 to 18 thousand tons in 2008, on the back of the lethargic demand for long products due to the ailing construction sector around the world. As for flat steel exported quantities, they also witnessed a deceleration, but at a lower rate, as they plummeted by around 10%, from 995 thousand tons in 2007 to 898 thousand tons in 2008.

- On the other hand, the local sales volume were elevated by 3.3%, reaching 3.7mn tons in 2008, compared to 3.6mn tons a year before. Although the quantities sold domestically constituted 80.2% of total sales in 2008, they could not lead to a positive growth in total sales, as the dip realized in the export sales volumes exceeded the acceleration of the quantities sold in the domestic market. The incline in the local sales came from sold rebars, which grew by 7.7% Y-o-Y. Alternatively, flat products sold in the local market fell by 16.0%, from 667 thousand tons in 2007 to 560 thousand tons in 2008.

- In the first quarter of 2009, the total sales volume on the consolidated level witnessed a 17.8% decrease, as it reached 1.06mn tons, compared to 1.29mn tons sold in Q1 2008. The main reason for such decline was the 64.7% dip in the Group’s exports, whereas local sales volumes witnessed a slight decline of 1.6% Y-o-Y.

- Despite the fact that 2008 was a gloomy year for most industries around the world, it was a successful one for Al Ezz Steel Rebars. The Company was able to realize an impressive growth rate of 34.9% in its Sales, which amounted to LE21.8bn, compared to LE16.2bn in 2007.

- Among Ezz subsidiaries, EZDK was the main contributor to the Group’s Sales in 2008, constituting 53.4% of the consolidated Sales. EZDK was able to realize a 41.5% increase in the long products sales over the year, which jumped from LE5.9bn in 2007 to LE8.3bn in 2008. In the mean time, flat steel sales of EZDK grew by 16.4% Y-o-Y, reaching LE3.1bn.

- ESR/ESM followed EZDK with a contribution of 30.1% to the total consolidated Sales in 2008. The Subsidiary’s sales of long products surged from LE4.5bn to LE6.6bn, realizing a 44.7% Y-o-Y incline. Finally, EFS came with a share of 16.7% of realized revenues in the same year. Although the facility was closed in the last quarter of 2008 for a major overhaul, the Company was able to accelerate its flat steel revenues by 24.6% over the year, to reach LE3.6bn, up from LE2.9bn in 2007.

- As for Q1 2009, consolidated sales fell by 0.6% on a Q-o-Q basis, on the back of the plummeting sales of the EFS facility, which sold 4 thousand tons over the quarter, compared to 58 thousand tons in Q4 2008. Also, the consequences of the world financial



crisis were reflected on the performance of the first quarter of 2009, as total consolidated sales tumbled by 17.7% on a Y-o-Y basis.

- The Company aims at using the DRI process in all of its facilities, similar to the process used in EZDK. Therefore, it began with the flat steel factory in Suez (EFS), where it plans to establish a DRI unit, with an annual production capacity of 1.65mn tons and an investment cost of US$400mn. The unit is expected to be operational by mid 2011. In addition, The Company intends to enhance the steel making capacities of EFS and provide more flexibility in the production process, which would be achieved through having the ability to produce both long and flat products according to the prevailing demand in the market. Thus, the Company announced that it would establish a billet caster to be operational by 2010, with an investment cost of US$75mn.

- Moreover, Ezz Steel announced that it will construct a new Greenfield steel plant in Algeria, its first outside Egypt. The new complex, which will have a capacity of 3.2mn tons of DRI and 3mn tons of finished products, will be constructed over two phases. This complex will produce long products, to benefit from the booming Algerian housing sector. However, the implementation of this expansion remains on the table, as the Algerian government has lately announced some new measurements, which govern the foreigners’ investments in the country, of which was restricting foreign participation in any business to only 49%. In addition, taxes of 15% will be imposed on repatriated capitals starting from 2009.

- We initiate our coverage of Al Ezz Steel Rebars Company (Ezz Steel) with a ‘BUY’ recommendation. Based on the combination of the Sum of Parts Discounted Cash Flows Method and Peer Group Valuation Method, we have valued the Company’s shares at an intrinsic value of LE21.4 per share, with a 68.3% premium over the current market price (as of July 26th, 2009) of LE12.7 per share.

Table 06: Investment Indicators for Al Ezz Steel Rebars Company (Ezz Steel)CMP (LE) Shares in Issue (mn) M-Cap (LE mn) 52-Week Hi/Lo (LE)

12.7 543.3 6,899.5 28.57 4.54

Year

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(LE mn)

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(LE)

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(LE)

ROAE

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(x)

2010 F 3,590.3 1,573.6 1.5 29.8 9.72% 8.46 0.43

2009 F 2,499.8 762.0 0.7 29.3 4.80% 19.42 0.43

2008 A 4,958.3 2,564.3 2.3 34.2 13.79% 3.86 0.25

2007 A 4,308.2 2,221.7 6.2 86.9 14.02% 3.61 0.26Source: Company’s Annual Reports, Mubasher and Global Research. Historical P/E & P/BV multiples based on respective year-end prices, while that for future years are based on current market price in the EGX as of July 26th, 2009.

Share info

The Company’s share <ESRS.CA> was originally listed on the Egyptian Exchange in May 1999 and ever since the stock has been actively traded.

In June 1999, Al Ezz Steel Rebars issued GDRs <AEZD:LSE> on the London Stock Exchange. Each GDR is equivalent to 3 ordinary shares, which par amounts to LE5. It is worth mentioning that the Company’s GDR is not heavily traded when compared to the local share activity.



Chart 52: Ezz Steel Share (ESRS.CA) Price Performance versus EGX30 Index

Source: Mubasher, Global Research

Table 07: Liquidity of ESRS StockParticulars 2006 2007 2008 Q1 2009

Volume of Shares Traded (000s) 422,638.0 287,318.0 451,050.0 194,504.3

% of Total Market 5.4% 2.5% 2.1% 3.6%

Value Traded (LE000s) 11,841,258.3 6,141,794.7 9,048,302.6 1,511,129.1

% of Total Market 4.4% 1.9% 1.9% 3.1%

Market Price (LE) at period end 16.5 22.2 8.7 7.2

Market Capitalization (LE000s) 3,004,506.3 4,039,898.5 4,699,242.5 3,916,940.8

% of Total Market 0.6% 0.5% 1.0% 1.0%Source: Mubasher and Global Research

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75.2%

Ezz Industries

Al Ezz Steel Rebars

(Ezz Steel)

ESM 90.7%

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Free Float

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53.2%

EFS EZDK

Company Overview

Background

Al Ezz Steel Rebars Company (Ezz Steel) <ESRS.CA> is deemed to be the dominant steel producer in Egypt. The Company was founded on April 2nd 1994, in accordance with law No. 159/1981. Ezz Steel is located in the industrial zone of El Sadat City and is 65% owned by Ezz Industries, which belongs to Eng. Ahmed Ezz.

Company Structure

Figure 03: Ezz Steel Company Structure

Source: Ezz Steel Website

Subsidiaries

Table 08: Ezz Steel SubsidiariesCompany Name DescriptionAl Ezz Steel Mills Company (ESM) The company, which is an Egyptian Joint Stock

Company, was established in 1986. ESM is located

in the 10th of Ramadan City and specializes in

producing long products.Al Ezz Dekheila for Steel – Alexandria (EZDK) Established in Alexandria in1982 as a Joint

Investment Company in accordance with law No.

43/1974, which was replaced by law No. 8/1997.

The company was acquired by Ezz Steel in 1999

and is now a Joint Stock Company. EZDK produces

both long and flat steel products. Al Ezz Flat Steel Company (EFS) An Egyptian stock Company, established in 1998,

in accordance with law No. 8/1997. EFS is located

in Suez City and produces flat steel products.Source: Ezz Steel Website and Financials

Ezz Steel’s main line of business is the production, trade and distribution of various steel products used in a wide range of applications. In addition, Ezz Steel imports raw materials, equipment and spare-parts to help meet the Company’s needs and exports its products to customers in the region and around the world.



Management

Table 09: Ezz Steel Executive Officers Eng. Ahmed Ezz, Chairman and

Managing Director

Eng. Ezz has been chairman of the board of directors (‘‘Chairman’’)

and Managing Director (‘‘Managing Director’’) of Ezz Steel since

he founded the Company in 1994. He also serves as Chairman of Ezz

Group (a position he has held since the founding of the Company in

1998), as Chairman and Managing Director of EZDK (a position he

has held since 2000), as Chairman and Managing Director of EFS (a

position he has held since the founding of the Company in 1998). Mr.

Ezz is a member of the Egyptian Parliament since 2000.Mr. Hassan Nouh, General Manager Mr. Nouh was appointed General Manager of Ezz Steel in February

2005. Prior to this appointment, he served as the finance manager of

Ezz Steel from 2002 to 2005.Mr. Farouk Ibrahim, Corporate Technical Officer Mr. Ibrahim was appointed the Technical Corporate Officer of Ezz

Steel in 1994. He is a member of the board of directors of EZDK,

a position he has held since 2000. He is also General Technical

Manager of EZDK, a position he has held since 2000.Mr. Samir Naaman, Corporate Sales Officer Mr. Naaman was appointed the Sales Corporate Officer of Ezz Steel

in 1999.Mr. George Matta, Corporate Marketing Officer Mr. Matta was appointed the Marketing Corporate Officer of Ezz

Steel in 1997.Mr. Nabil El Khatib, Corporate Procurement

Officer

Mr. El Khatib was appointed the Procurement Corporate Officer of

Ezz Steel in 1994.Source: Ezz Steel Website

Capital and Shareholder Structure

Al Ezz Steel Rebars Company has an authorized capital of LE8bn, while the issued and paid-in capital rounds at approximately LE2.7bn, distributed over 543mn shares at a par value of LE5/share. Ezz Steel is owned by Ezz Industries, which control around 66% of the Company, while the rest of shares are free floated.

Chart 53: Shareholders’ Structure (as of March 2009)

Source: EGID

On December 31st, 2007, the extraordinary general assembly of Al Ezz Steel Rebars approved the issuance of a new LE100 par value, 11.5% semi-annual coupon paying corporate bond. Through this issuance the Company was able to raise a LE1.1bn that was used to repay the

Ezz Industries65.7%

Free Float34.3%



already existing long term debt and part of its short term debt. Moreover, Ezz Steel has a bond prepayment option that could be exercised any time after the second year of the issuance. On May 29th, 2008, the subscription of the bond issuance was completed.

On January 30th, 2007, the Board of Directors decided to raise the Company’s paid-in capital by LE380,000 by converting 292 bonds to 75,920 shares with a par value of LE22/share. To perform this conversion, the Company had to pay a premium of LE17/share above the existing shares par value of LE5/share. Moreover, On July 30th, 2008, the Board of Directors decided to increase the Company’s paid-in capital from LE0.9bn to LE2.7bn, through a 2:1 rights issue at par, LE5/share.

Operations Summary

Ezz Steel is among the top steel producers in the MENA region. The Company is believed to have a market share of over 55% of the total Egyptian capacity and has been under severe scrutiny from the media, as monopoly accusations have been continuously pointed at the company, especially after its acquisition of EZDK. The main business of Ezz Steel is the production and trade of different types and grades of steel.

Al Ezz Steel Rebars was founded in 1994 and had an initial capacity of 0.4mn tons of long steel products. Over the past 15 years, the Company continued to grow and acquire other companies, increasing its capacities to an estimated 5.3mn tons in 2008, consisting of 3.1mn tons of long products and 2.2mn tons of flat products. Moreover, major expansion projects in Egypt and abroad have been announced, which will increase the Company’s combined total capacity.

Table 10: Major events at Ezz SteelYear Event

1994 Eng. Ahmed Ezz established Al Ezz Steel Rebars

1995 Ezz Steel acquired ESM, with a combined production capacity of 0.4mn tons

1996 Ezz Steel began production, with a capacity of 1.0mn tons, bringing the total production capacity to 1.4mn tons

1999 Ezz Steel went public and acquired a stake in EZDK, where the combined capacity reached 3.1mn tons

2000 Flat steel production at EZDK begun and the combined capacity reached 4.1mn tons

2003 Flat steel production at EFS begun and the combined capacity reached 5.3mn tons

2006 Full restructuring to unify the company structure was completed Source: Annual Company Report 2006

In February 2006, Ezz Steel issued 88mn shares, which were swapped with 4.0mn shares of EZDK, owned by other companies in the Group. The deal raised the Group’s capital in Ezz Steel and in the mean time raised the holdings of Ezz Steel in EZDK from 21.28% to 50.28%. This share was further raised in 2008 when Ezz Steel acquired an additional stake of 2.96%.

Over the period from June to October 2006, Ezz Steel acquired the Group’s share in EFS, represented by 35%, bringing Ezz Steel share in EFS to 54.23%. This share was further raised to 75.15% in 2007.

Through its three subsidiaries, the Company produces both long and flat products. Long products are produced by Ezz Steel Rebars (ESR), ESM and EZDK, while flat products are produced by both EZDK and EFS. In EZDK, the process starts with importing the raw



materials required, namely iron ore pellets. The pellets are reduced using the DRI process, then are transferred to an electric arc furnace, ladle furnace and are then casted to produce the different products. In ESR, ESM and EFS, the main raw material used is scrap metal, which is directly transferred into the EAF, then the ladle furnace and is then casted to produce the final products. Afterwards, the company dispatches its products to various customers in Egypt and around the world.

Ezz Steel produces long products with various specifications, as these products are an essential part of the construction industry. As the construction activities internationally grew over the last couple of years, driven by emerging markets, the Company has benefitted immensely and in 2008, long products constituted around 68% of the Company’s sales. As mentioned before, long products are produced at ESR, ESM and EZDK, which are all strategically located to meet customer needs both locally and abroad and can produce a wide range of long products.

Table 11: Ezz Steel Long Products Plants Location Location of Plants Products Capacity Commission Year

Alexandria Rebars, Wire Rod 1.7mn tons 1986

Sadat City Rebars 1.0mn tons 1996

10th of Ramadan City Rebars, Wire Rod 0.4mn tons 1993

3.1mn tonsSource: Ezz Steel Website

Even though the demand for long products is higher in the local market, Ezz Steel is a major producer of flat products and owns state of the art facilities in Alexandria (EZDK) and Suez (EFS). Both facilities use hot-strip mills to produce high quality Hot Rolled Coils. It is worthy to note that Ezz Steel products have been able to meet some of the toughest international standards, such as the ISO, US, UK, German and French standards among many more.

Table 12: Ezz Steel Flat Products Plants Locations Location of Plants Products Capacity Commission Year

Alexandria HRC 1.0mn tons 1986

Suez HRC 1.2mn tons 2002

2.2mn tonsSource: Ezz Steel Website

Production Development

Over 2008, the Company reduced its consolidated production by 4.6% to 4.6mn tons, down from 4.8mn tons in 2007. The reduction was mainly in the flat steel output, which declined by 16.6%, from 1.7mn tons in 2007 to 1.4mn tons in 2008. The slump in flat production came primarily from the EFS facility, which output shrank by 203 thousand tons, representing a drop of 21.8% over the previous year, as the facility stopped operations for a major overhaul. Apparently this was due to the sluggish demand for flat steel all over the globe, taking into consideration that the majority of flat steel is directed to exports. As for flat steel produced by EZDK, it fell by 10.3% in 2008.

On the other hand, rebars production witnessed a slight increase of 1.9%, as it grew from 3.1mn tons in 2007 to 3.2mn tons in 2008. This was a result of the rise in the production of



EZDK by 3.0%, as ESR/ESM production slightly rose by 0.4% Y-o-Y.

Chart 54: Rebars ProductionDevelopment - 2007 to 2008

Chart 55: Flat Steel ProductionDevelopment - 2007 to 2008

Source: Ezz Steel Financials

Over the first quarter of 2009, the Group’s output declined by 15.5% Y-o-Y, reaching 1.0mn tons, compared to 1.2mn produced in the same period of the previous year. This decline was a result of the 55.1% fall in flat steel production, which in turn was caused by the closure of EFS facility. Also, flat steel produced by EZDK shrank by 11.2% Y-o-Y over the same period.

As for rebars, production increased by 8.0% from 774 thousand tons in Q1 2008 to 836 thousand tons in Q1 2009. The main contributor to such increase was ESR/ESM, which accelerated its output by 17.3%, whereas EZDK rebars output rose merely by 1.7%.

Chart 56: Rebars ProductionDevelopment (Q1 2008-Q1 2009)

Chart 57: Flat Steel Production Development (Q1 2008-Q1 2009)


Sales Development

Over 2008, the consolidated sales of the Company reached 4.6mn tons, down from 4.9mn tons sold the previous year, a drop of 5.2%. This was a result of the plunge of the exported quantities by 28.9%, from 1,289 thousand tons to 916 thousand tons, which was mainly due to the 93.9% slump in exported volumes of rebars, from 294 thousand tons in 2007 to 18 thousand tons in 2008, on the back of the lethargic demand for long products due to the ailing construction sector around the world. On a standalone basis, EZDK witnessed a decline of 90.1%, while ESR/ESM did not export rebars over the year.

312 366462 470-

50

100

150

200

250

300

350

400

450

500

Q1 2008 Q1 2009

Tho

usan

d to

ns

ESR/ESM EZDK

233 207228-

50

100

150

200

250

Q1 2008 Q1 2009

Tho

usan

d to

ns

EZDK EFS

1,367 1,3731,759 1,812-

200400600800

1,0001,2001,4001,6001,8002,000

2007 2008

Tho

usan

d to

ns

ESR/ESM EZDK

775 695932 729-

100200300400500600700800900

1,000

2007 2008

Tho

usan

d to

ns

EZDK EFS



As for flat steel exported quantities, they also witnessed a deceleration, but at a lower rate, as they plummeted by around 10%, from 995 thousand tons in 2007 to 898 thousand tons in 2008, mainly coming from the 22.1% fall in EZDK quantities, compared to a 2.7% fall in EFS volumes.

Chart 58: Export Sales VolumeDevelopment (Rebars) - 2007 to 2008

Chart 59: Export Sales VolumeDevelopment (Flat) - 2007 to 2008


On the other hand, the local sales volume were elevated by 3.3%, reaching 3.7mn tons in 2008, compared to 3.6mn tons a year before. Although the quantities sold domestically constituted 80.2% of total sales in 2008, they could not lead to a positive growth in total sales, as the dip realized in the export sales volumes exceeded the acceleration of the quantities sold in the domestic market. The incline in the local sales came from sold rebars, which grew by 7.7% Y-o-Y. This rise was a result of the increased quantities sold by ESR/ESM and EZDK, as each inclined by 7.7% in 2008.

Alternatively, flat products sold in the local market fell by 16.0%, from 667 thousand tons in 2007 to 560 thousand tons in 2008, primarily caused by the 40.5% plummet of EFS sold quantities. As for EZDK, the locally sold flat products dwindled from 408 thousand to 406 thousand tons, a 0.5% Y-o-Y decrease.

Chart 60: Local Sales Volume Development (Rebars) - 2007 to 2008

Chart 61: Local Sales Volume Development (Flat) - 2007 to 2008


In the first quarter of 2009, the total sales volume on the consolidated level witnessed a 17.8% decrease, as it reached 1.06mn tons, compared to 1.29mn tons sold in Q1 2008. The

1,283 1,3821,641 1,767-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2007 2008

Thousa

nd t

ons

ESR/ESM EZDK

408 406259 154-

50100150200250300350400450

2007 2008

Thousa

nd t

ons

EZDK EFS

112 182 18-

20406080

100120140160180200

2007 2008

Thousa

nd t

ons

ESR/ESM EZDK

362 282633 616-

100

200

300

400

500

600

700

2007 2008T

housa

nd t

ons

EZDK EFS



main reason for such decline was the 64.7% dip in the Group’s exports, which was in turn a result of a 63.8% slump in flat steel exported volumes after the closure of EFS plant, which exports fell to 4 thousand tons in Q1 2009, down from 203 thousand tons exported in the first quarter of 2008. It is worth mentioning that EZDK exports of flat steel remained at the same level realized in Q1 2008. Also, exports of rebars fell by 77.3%, as EZDK exports dropped by 73.6% and ESR/ESM did not export any quantities over the same period.

Chart 62: Export Sales Volume Development - Rebars (Q1 2008- Q1 2009)

Chart 63: Export Sales Volume Development - Flat (Q1 2008-Q1 2009)


On the other hand, local sales volumes witnessed a slight decline of 1.6% Y-o-Y in Q1 2009. The decline resulted from a 50.2% deceleration in sales of flat steel, as EFS sales dropped by 99.7% from 50.66 thousand tons to 0.13 thousand tons. In addition, EZDK sales of flat steel declined by 32.4% from 142 thousand tons to 96 thousand tons. Alternatively, local sales of rebars inclined by 10.8%, on the back of the increase in both ESR/ESM and EZDK sales by 13.5% and 8.8%, respectively.

Chart 64: Local Sales Volume Development - Rebars (Q1 2008-Q1 2009)

Chart 65: Local Sales Volume Development - Flat (Q1 2008-Q1 2009)


Expansion Plans

The Company aims at using the DRI process in all of its facilities, similar to the process used in EZDK. Therefore, it began with the flat steel factory in Suez (EFS), where it plans to establish a DRI unit, with an annual production capacity of 1.65mn tons and an investment cost of US$400mn. The unit is expected to be operational by mid 2011.

318 361444 483-

100

200

300

400

500

600

Q1 2008 Q1 2009

Thousa

nd t

ons

ESR/ESM EZDK

142 9651-

20

40

60

80

100

120

140

160

Q1 2008 Q1 2009

Tho

usan

d to

ns

EZDK EFS

3 18 5-2468

101214161820

Q1 2008 Q1 2009

Tho

usan

d to

ns

ESR/ESM EZDK

107 108203 4-

50

100

150

200

250

Q1 2008 Q1 2009

Tho

usan

d to

ns

EZDK EFS



In addition, the Company intends to enhance the steel making capacities of EFS and provide more flexibility in the production process, which would be achieved through having the ability to produce both long and flat products according to the prevailing demand in the market. Thus, the Company announced that it would establish a billet caster to be operational by 2010, with an investment cost of US$75mn.

It is worth mentioning that EZDK announced that it will subscribe in the capital increase of its sister company EFS, by injecting US$330mn in EFS’s capital to reach US$600mn, from its current level at US$270mn. Of the US$330mn, EZDK has already paid US$110mn in July 2009 as a first tranche in the capital increase. The Group came up with the capital increase decision to finance EFS’s capacity expansion plans. Such move will have the effect of diluting the Group’s stake in EFS and bringing the Company under the umbrella of EZDK’s portfolio of investments, which will necessitate consolidating the results of EFS with those of EZDK in the future.

Chart 66: Ezz DRI Steel Plants Expansion Plans

Source: Ezz Steel 2007 Financial Results Presentation

Moreover, Ezz Steel announced that it will construct a new Greenfield steel plant in Algeria, its first outside Egypt. The new complex, which will have a capacity of 3.2mn tons of DRI and 3mn tons of finished products, will be constructed over two phases. This complex will produce long products, to benefit from the booming Algerian housing sector.

However, the implementation of this expansion remains on the table, as the Algerian government has lately announced some new measurements, which govern the foreigners’ investments in the country, of which was restricting foreign participation in any business to only 49%. In addition, taxes of 15% will be imposed on repatriated capitals starting from 2009.

It is worth mentioning, the new expansion project in Algeria was not accounted for in our projections, due to the Algerian government new investment laws, which we believe might cancel the Company’s plan.

3.2

9.63.2

3.2

0

2

4

6

8

10

12

ExistingCapacity

DomesticExpansion

RegionalExpansion

TotalCapacity

Milli

on to

ns



5.3

9.3

1

3

0

1

2

3

4

5

6

7

8

9

10

ExistingCapacity

DomesticExpansion

RegionalExpansion

TotalCapacity

Millli

on to

nsChart 67: Ezz Steel Finished Products Plants Expansion Plans

Source: Ezz Steel 2007Financial Results Presentation

Even though global economic conditions are tough, the Company has announced that it will continue with its expansion plans. By expanding its operations in Egypt and perhaps in Algeria, Ezz Steel will further enhance its reputation as the regional and local leader in steel production.



Consolidated Financial Performance 2008 & Q1 2009

Income Statement

Despite the fact that 2008 was a gloomy year for most industries around the world, it was a successful one for Al Ezz Steel Rebars. The Company was able to realize an impressive growth rate of 34.9% in its Sales, which amounted to LE21.8bn, compared to LE16.2bn in 2007.

Among Ezz subsidiaries, EZDK was the main contributor to the Group’s Sales in 2008, constituting 53.4% of the consolidated Sales. EZDK was able to realize a 41.5% increase in the long products sales over the year, which jumped from LE5.9bn in 2007 to LE8.3bn in 2008. In the mean time, flat steel sales of EZDK grew by 16.4% Y-o-Y, reaching LE3.1bn.

Chart 68: Subsidiaries Contribution to Sales


ESR/ESM followed EZDK with a contribution of 30.1% to the total consolidated Sales in 2008. The Subsidiary’s sales of long products surged from LE4.5bn to LE6.6bn, realizing a 44.7% Y-o-Y incline. Finally, EFS came with a share of 16.7% of realized revenues in the same year. Although the facility was closed in the last quarter of 2008 for a major overhaul, the Company was able to accelerate its flat steel revenues by 24.6% over the year, to reach LE3.6bn, up from LE2.9bn in 2007.

Chart 69: Subsidiaries Sales of Rebars Chart 70: Subsidiaries Sales of Flat Steel


54%

28%

18%

53%

30%

17%

0%

10%

20%

30%

40%

50%

60%

EZDK ESR/ESM EFS2007 2008

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2007 2008

LE

mn

EZDK ESR/ESM

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2007 2008

LEm

n

EZDK EFS



5,043

11,055

17,369

4,4233,412

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Q1 Q2 Q3 Q4 Q1

2008 2008 2008 2008 2009

LE

mn

3,173 3,252 3,3103,216

3,497 3,478 3,526 3,510

3,987

4,472

4,930

4,651

3,2183,849

4,219

4,4934,575

3,050

2,500

3,000

3,500

4,000

4,500

5,000

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2007 2008 2009

LE

/ton

Long Flat

The effects of the financial crisis were plainly demonstrated on the revenues of Q4 2008 and those of Q1 2009, which declined on a Q-o-Q basis by 74.5% and 22.9%, respectively, reaching LE4.4bn and LE3.4bn. It is worth mentioning that the revenues of the first three months of 2009 tumbled by 32.3% on a Y-o-Y basis.

Chart 71: Quarterly Consolidated Sales


Of the important factors that dwindled the consolidated Sales in these two quarters was the declining prices of steel, especially rebars prices, in addition to the closure of the EFS facility in Suez, as a consequence of the waning demand of the flat steel in the international markets, taking into consideration that most of the flat steel sales are directed to exports.

Chart 72: Average Selling Price (long and flat products)

Source: Ezz Steel Financials and Global Research

It is worthy to mention that the pricing policy of Al Ezz Steel Rebars implied a 5% discount to the imported steel prices, after adding transportation costs, which was a consistent policy used by the Company in the last few years to keep competent prices. Nevertheless, the Group had to amend its policy to cope with the conditions of the local market, by adding the same premium over the imported steel prices, especially in the first half of 2009, to provide room for imported steel to enter the local market, as an attempt to cover the increasing demand for steel, stemming from a robust construction sector.

Despite the 5.2% decline in the consolidated sales volumes over 2008, from 4.9mn tons to 4.6mn tons, the Group was able to realize an incline in its revenues, on the back of the soaring steel prices, especially in the first three quarters of the year.

The 13.7% Y-o-Y drop in the volumes sold of flat steel by EFS, as a result of the temporary closure of the plant, along with the 4.6% fall in EZDK total sales, were the main reasons behind the decline in the overall consolidated sales in 2008. Also, ESR/ESM sold volumes declined by 0.9% in 2008, further contributing to the drop of the consolidated sales, in terms of volumes.



Table 13: Consolidated Sales Volumes

In thousand tons 2007 2008%

changeContribution to

Total Sales - 2007Contribution to

Total Sales - 2008EZDK 2,593 2,473 -4.6% 53.1% 53.5%Rebars 1,823 1,785 -2.1% 37.4% 38.6%

Local 1,641 1,767 7.7% 33.6% 38.2%Exports 182 18 -90.1% 3.7% 0.4%

Flat Steel 770 688 -10.6% 15.8% 14.9%Local 408 406 -0.5% 8.4% 8.8%Exports 362 282 -22.1% 7.4% 6.1%

ESR/ESM 1,395 1,382 -0.9% 28.6% 29.9%Rebars 1,395 1,382 -0.9% 28.6% 29.9%

Local 1,283 1,382 7.7% 26.3% 29.9%Exports 112 - -100.0% 2.3% 0.0%

EFS 892 770 -13.7% 18.3% 16.6%Flat Steel 892 770 -13.7% 18.3% 16.6%Local 259 154 -40.5% 5.3% 3.3%Exports 633 616 -2.7% 13.0% 13.3%Total Consolidated Sales 4,880 4,625 -5.2% 100.0% 100.0%


On a quarterly basis, the major drop in 2008 consolidated sales volumes was in the third quarter, which declined by 10.9% compared to the second quarter. This was mainly due to the 19.1% plunge in EZDK sales, which shrank by 119 thousand tons, compared to Q2 2008. As for Q1 2009, consolidated sales fell by 0.6% on a Q-o-Q basis, on the back of the plummeting sales of the EFS facility, which sold 4 thousand tons over the quarter, compared to 58 thousand tons in Q4 2008. It is worth mentioning that the sales of these two quarters came from the finished goods inventory, as the plant has stopped operations in late 2008. Also, the consequences of the world financial crisis were reflected on the performance of the first quarter of 2009, as total consolidated sales tumbled by 17.7% on a Y-o-Y basis.

Table 14: Quarterly Sales BreakdownIn Thousand tons 2008 2008 2008 2008 2009

Q1 Q2 Q3 Q4 Q1EZDK

Rebars 462 428 418 477 488Flat Steel 250 196 87 156 204

Total EZDK Sales 712 624 505 632 693% growth Q-o-Q -12.4% -19.1% 25.3% 9.6%

ESR/ESM Rebars Sales 321 337 350 374 361% growth Q-o-Q 5.1% 3.7% 7.1% -3.4%

EFS Flat Steel Sales 253 242 218 58 4-4.6% -9.8% -73.4% -92.7%

Total Consolidated Sold Volumes 1,286 1,203 1,072 1,064 1,058 -6.5% -10.9% -0.7% -0.6%




The huge increase in the raw materials prices in the first half of 2008 resulted in higher COGS incurred by the Group over the year, which jumped by 42.0%, amounting to LE16.8bn. This resulted in an increase of the Company’s COGS/Sales ratio on the consolidated level from 73.3% in 2007 to 77.2% in 2008. Meanwhile, SG&A grew by 40.0%, reaching LE519.2mn in 2008, compared to LE370.9mn in the previous year. Consequently, the EBITDA margin fell from 24.4% to 20.4%.

EZDK, the main contributor to the Group’s revenues had a COGS/Sales ratio of 61.1% in 2008 and an EBITDA margin of 36.9%. It is worthy to note that the Group plans to use DRI in its production processes in all plants, similar to EZDK’s process, to realize an EBITDA margin close to that of EZDK, as the blended margin on the consolidated level reached 20.4% in 2008, affected by ESR/ESM and EFS realized EBITDA margins of only 2.3% and 0.6%, respectively.

During the first three quarters of 2008 and before the financial crisis effects were reflected on the Group’s results, the operating expenses and revenues were somehow stable, as the COGS/Sales ratio ranged between 71% and 73%, and the EBITDA margin between 21% and 23%. However, as revenues plummeted in the fourth quarter, the COGS/Sales ratio jumped to 92.6%, despite the shrinkage of COGS by 67.9% on a Q-o-Q basis. Accordingly, this was reflected on the EBITDA margin, which dropped to a mere 6.1% in the last quarter of 2008.

It is worthy to mention that the management took the decision to get rid of the high cost inventory accumulated during the 9-month period ending September 2008, as the steel market showed signs of weakness on the back of the financial crisis that hit the international economy. This decision aimed at capitalizing on the first strong three quarters of 2008 to offset the high cost inventory effect on the 2008 full year COGS.

Chart 73: Ezz Steel Quarterly Operating Revenues and Expenses


In Q1 2009, COGS declined by 18.0% Y-o-Y and 28.2% Q-o-Q, which was higher than the 22.9% Q-o-Q drop in the quarter’s revenues, leading to a lower COGS/Sales ratio of 86.2%, compared to the previous quarter, but which is still too high compared to Q1 2008. The lower COGS/Sales ratio in Q1 2009 led to an elevated EBITDA margin reaching 11.1%.

Despite the increased costs incurred over 2008, the consolidated net profit, after excluding extraordinary items and minority interest grew by 15.4%, reaching LE2.6bn, compared to LE2.2bn in 2007. This was mainly a result of the 34.9% incline in Sales, along with the

71% 72% 73%

93%86%

27% 25% 24% 6% 11%

23% 22% 21%

2%7%

0%10%20%30%40%50%60%70%80%90%

100%

Q1 Q2 Q3 Q4 Q1

2008 2008 2008 2008 2009

COGS/Sales EBITDA Margin EBIT Margin



95.3% rise in interest income and the 16.8% decline in interest expense. It is worthy to mention that the Group has not taken any provisions over the year. In addition, the income tax rose by 39.8% Y-o-Y, while the deferred taxes shrank by 63.4%.

Chart 74: Ezz Steel Profitability


On a quarterly basis, Q4 2008 was the worst quarter over the year. The huge slump in the consolidated revenues of the quarter was behind the losses reported in the income statement, which amounted to LE201.1mn, after excluding extraordinary items and minority interest, compared to a net profit of LE2.8bn realized in the previous quarter. Other factors contributing to the net loss include a 32.1% drop in interest income, along with a 275.5% rise in non-operating expenses.

As for Q1 2009, the Company was able to realize a net profit of LE66.4mn after the losses incurred in the last quarter of 2008. Nevertheless, after excluding extraordinary items and minority interest, the quarter’s net profit represents a Y-o-Y fall of 85.1% compared to Q1 2008, mainly caused by the 32.3% Y-o-Y slump in Sales. Also, interest expense inclined by 52.1% on a Y-o-Y basis, reaching LE213.6mn, compared to LE140.4mn in Q1 2008.

17% 14% 12%22%

14% 15%

103%

72%60%

0%

20%

40%

60%

80%

100%

120%

2006 2007 2008Return on Sales Return on Average Assets Return on Average Equity



Table 15: Ezz Steel 2008 Q-o-Q Income StatementIncome Statement 2008 2008 2008 2008 2009

In LE000s Q1 Q2 Q3 Q4 Q1

Net Sales 5,042,706.0 11,054,996.0 17,368,609.0 4,423,422.0 3,411,874.0

Other Operating Revenues

Revenues from Operation 5,042,706.0 11,054,996.0 17,368,609.0 4,423,422.0 3,411,874.0

growth 119.2% 57.1% -74.5% -22.9%

COGS 3,587,909.0 7,996,380.0 12,739,772.0 4,093,929.0 2,941,152.0

growth 122.9% 59.3% -67.9% -28.2%

COGS/Sales 71.2% 72.3% 73.3% 92.6% 86.2%

S. , G. & Adm. Expenses 109,790.0 289,236.0 460,925.0 58,248.0 92,870.0

growth 163.4% 59.4% -87.4% 59.4%

SG&A/Sales 2.2% 2.6% 2.7% 1.3% 2.7%

EBITDA 1,345,007.0 2,769,380.0 4,167,912.0 271,245.0 377,852.0

EBITDA Margin 26.7% 25.1% 24.0% 6.1% 11.1%

Depreciation 164,466.0 327,607.0 492,964.0 166,221.0 146,379.0

Operating Profit -EBIT 1,180,541.0 2,441,773.0 3,674,948.0 105,024.0 231,473.0

EBIT Margin 23.4% 22.1% 21.2% 2.4% 6.8%

Interest Income 18,473.0 41,164.0 77,499.0 52,660.0 40,342.0

Investment Income - - - - -

Interest Expense 140,419.0 271,315.0 413,106.0 177,413.0 213,630.0

Other Provisions - - - - -

Other Non-Operating Income 9,447.0 107,889.0 129,282.0 - 104,200.0

Other Non-Operating Expenses 62,827.0 52,220.0 29,084.0 109,197.0 -

Net Profit Before Tax 1,005,215.0 2,267,291.0 3,439,539.0 (128,926.0) 162,385.0

Income Tax 184,399.0 419,977.0 630,807.0 56,463.0 32,843.0

Deferred Tax 11,763.0 14,710.0 43,338.0 15,688.0 9,369.0

Net Profit After Tax 809,053.0 1,832,604.0 2,765,394.0 (201,077.0) 120,173.0

ROS 16.0% 16.6% 15.9% N/A 3.5%

Capital Gain/Loss 237.0 227.0 369.0 40.0 -

Minority Interest 372,897.0 813,842.0 1,245,267.0 96,109.0 53,789.0

Net Profit After Unusual Items 436,393.0 1,018,989.0 1,520,496.0 (297,146.0) 66,384.0 Source: Ezz Steel Financials

Balance Sheet

Assets

The Consolidated assets of Al Ezz Steel Rebars grew by 17.3% in 2008, reaching LE18.6bn, compared to LE18.5bn in 2007. This came on the back of the 619.7% rise in excess cash, contributing to 16.2% of the total assets, in addition to the 24.7% jump in inventory, which in turn makes up 17.1% of the total assets in 2008.

It is worthy to note that the current assets accounts for 41.9% of 2008 balance sheet, whereas the net fixed assets share represents 53.9%.

The Company reported LE315.2mn as goodwill in its 2008 balance sheet, resulting from the acquisition of an additional share of 2.96% in EZDK, bringing its total share in the subsidiary to 53.24%.



As the total assets increased at a lower rate than that of the Sales over 2008, the assets turnover declined to 0.85 compared to 0.98 in 2007.

Chart 75: Assets Contribution to 2008 Balance Sheet


On the other hand, the total assets declined by 10.9% in Q1 2009, compared to year end 2008, reaching LE16.6bn, mainly due to a decline of 43.8% in excess cash and a 15.8% plunge in inventory, where both contribute to 10.2% and 16.1% of the total assets, respectively.

In 2008, the Group’s total liabilities, accounting for 62.7% of the balance sheet, increased by 10.5%, as they amounted to LE11.7bn, up from LE10.5bn a year before. This was mainly attributed to the bond issuance in May 2008, with a face value of LE1.1bn, to early repay the Group’s long term debt and part of its short term debt. Moreover, the short term debt increased by 39.4%, reaching LE533.9mn, and contributed to the increase in total liabilities.

The Company increased its capital from LE876.1mn to LE2.6bn in 2008 –after excluding treasury stocks. Also, retained earnings rose by 86.7%, amounting to LE1.9bn, leading to increasing the equity by 55.5%. On the other hand, the consolidated total debt rose by 6.3%, which resulted in a lower Debt/Equity ratio from 218.5% to 149.3%.

Chart 76: Liabilities and Equity Contribution to 2008 Balance Sheet


Concerning Q1 2009, total liabilities dropped by 10.2%, reaching LE10.5bn, on the back of the 95.9% decline in the short term debt, reaching LE76.9mn, and the 95.2% fall in taxes payable, reaching LE32.8mn. Meanwhile, the Debt/Equity ratio reached 152.3% after the total debt plunged by 11.1% and the equity shrank by 12.8%, mainly due to lower retained earnings, which diminished by 41.2%, amounting to LE1.1bn.

Excess Cash 16%

Inventory 17%

Other Current Assets

9%

Net Fixed Assets54%

Other Long Term Assets

4%

Short Term Debt 10%

CPLTD11%

Other Current Liabilities

17%

Long Term Loans14%

Other Long Term Liabilities

10%

Equity28%

Minority Interest10%



Main Forecast Assumptions

In light of our global, regional and local outlook on the steel sector, we projected Al Ezz Steel Rebars, or the Group, Sales under the Group’s planned capacity additions and new projects over the forecasted period, which starts from 2009 and ends in 2013.

Table 16: The Group’s Capacity Expansions

Company ProjectEstimated

CostCompletion

Date Notes

EFS Billet Caster US$75mn 2010 Will enable the Company to switch

production between long and flat products

DRI Unit US$400mn 2011 With a capacity of 1.65mn tons of DRI,

which will increase the capacity of finished

products to 1.5mn tons Source: Ezz Steel

Consolidated Sales Volumes

Despite the robust consumption of steel in the Egyptian market, mainly long products, the Group’s sales volumes are forecasted to decline by 14.5% in 2009, due to the 50.1% expected dip in the sales of flat steel. Total sales will surge by 12.2% in 2010, as a result of the billet caster installation in EFS, which will provide the Group with flexibility to switch between long and flat products according to the market needs. In 2011, the consolidated sales volumes are expected to witness a considerable growth of 18.6%, mainly driven by the expected rebound of flat steel demand worldwide, accompanied by the installation of the DRI unit in EFS, which will further expand the plant’s capacity by an additional 300 thousand tons of finished products, including both long and flat steel. Afterwards, growth is expected to stabilize at around 1% or less in the last two years of the projection period.

Chart 77: Forecasted Consolidated Sales Volumes


Subsidiaries Sales Volumes

EZDK

The Company’s sales of rebars are expected to witness a 4.0% incline in the first year of the projection period, on the back of the expected strong demand. However, growth is expected to decline by 2.7% in 2010, as demand for long products eases in the Egyptian market, then

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2008 2009 F 2010 F 2011 F 2012 F 2013 F

In th

ousa

nd to

ns

Long Flat



growth will stabilize for the rest of the projection period at a rate less than 1%, since EZDK is already operating above its designed capacity.

The Company’s exports/sales ratio was 10% in 2007 and dropped to 1% in 2008, affected by the financial crisis. The ratio is expected to fall further to less than 1% in 2009 and reach 1.3% in 2010 and then to stabilize at 5% starting from 2011 until 2013.

As for flat products, sales are expected to increase by 5.2% in 2009, and then to decline by 2.3% the following year. By 2011, EZDK flat steel sales are forecasted to jump by 8.9%, triggered by the expected increase in demand. Afterwards, sales are expected to grow at an average rate of 3.0% in 2012 and 2013.

Over 2008, the Company oriented 41.0% of its flat steel sales to the exports market. However, in Q1 2009, the ratio reached 53.0%, exceeding the 43.0% recorded in the same quarter of 2008. Therefore, we projected the exports ratio to reach around 44% in the first year of our projection period and then to hover at 46% in 2010 and 2011 and remain stagnant at 47% until 2013.

ESR/ESM

Taking into consideration that the Company is producing only long products, sales are expected to remain stagnant in 2009 and 2010, with a slight decline of less than 1% and then to incline by 5.2% by 2011, in response to an expected incline in demand from international markets. Growth is then expected to stabilize at almost the same levels for the rest of the projection period.

In 2008 and the first quarter of 2009, the Company’s sales were directed to the local market. Therefore, we assumed no exports throughout 2009, a minimal orientation to international markets by 2010, and then we expected a s3% ratio of exports/sales starting from 2011 and thereafter.

EFS

Due to the plunge of demand for flat steel worldwide, EFS facility is expected to remain closed without producing flat steel in 2009 and the first half of 2010. However, as the billet caster is expected to be installed by 2010, we assumed the Company will start producing rebars from the second half of the year. Production of flat steel will start from 2011, as demand is expected to bounce back. Once the DRI unit operates by mid 2011, it will provide an additional capacity of 300 thousand tons of finished products. Growth rates are expected to reach 96.2% for flat steel and then to average at around 2% in 2012 and 2013. As for rebars, sales are expected to grow at 3.9% in 2011 and then to grow at less than 1% over the rest of the forecasted period.

The Company is expected to orient its rebars sales to the local market in 2010, then the exports/sales ratio is expected to reach around 11% in 2011 and remain stable at 13% for the two consecutive years. As for flat steel, the Company is expected to export 80% of its sales to the international markets by 2011, in line with the expectations for demand rebound. The exports/sales ratio is then expected to reach 75% in 2012 and fall to 57% in 2013.



Prices

As 2008 was considered an abnormal year and the huge rises achieved in steel prices are not expected to reoccur, we assumed that rebars and flat products prices will decrease by around 33% and 35% in 2009, respectively. We then assumed that prices will witness slight growth and will maintain levels similar to those of 2007.

Chart 78: Forecasted Selling Prices vs. Historical Average Prices


Consolidated Sales Value

Based on the aforementioned assumptions and the implications of the world financial crisis, Sales value of Ezz Steel on the consolidated level are expected to witness a decline of more than 40% in 2009. The installation of the billet caster in EFS facility is to enhance the Group’s Sales, which are forecasted to rise by around 14% in 2010. In 2011, total Sales of the Group are expected to jump by 24%, mainly caused by the capacity additions at EFS after the installation of the DRI unit. Afterwards, the consolidated Sales are forecasted to incline by 3.6% and 1.7% in 2012 and 2013, respectively.

Subsidiaries Sales Value

EZDK

EZDK, contributing to 64.5% of the consolidated Sales in 2009, is expected to witness a 30.8% drop in its 2009 Sales. The expected drop stems mainly from a 30.6% plunge in long products sales, as a result of declining prices. Also, the flat products sales are expected to fall by 31.4% over the year. Total Sales of the Company are expected to remain stagnant in 2010 and then to incline by around 8% in 2011, on the back of an acceleration in the sold volumes of flat and long steel products accompanied by an expected appreciation in steel prices. The Company’s Sales are then expected to rise by 3.9% and 2.2% in 2012 and 2013, respectively. It is worth mentioning that the expected growth rates in flat steel sales are higher than rebars sales in the last three years of the projection period.

ESR/ESM

As for ESR/ESM, we also estimate a decline of around 35% in the subsidiary’s Sales over 2009, as a result of the concurrent market conditions, but then we expect an average growth rate of around 3.7% over the projected period.

2,500

3,000

3,500

4,000

4,500

5,000

2006 2007 2008 2009 F 2010 F 2011 F 2012 F 2013 F

LE/to

n

Long Flat



EFS

As the plant is expected to remain closed in 2009, Sales are forecasted to plummet by around 96%. It is worth mentioning that the Sales value realized in the first quarter of 2009 are related to other products, while sold volumes of flat steel were related to intercompany sales with EZDK. The closure of the plant is a main contributor to the expected drop in the consolidated Sales value over the year. With the installation of the billet caster in 2010 and the start of rebars production along with the expected increase in prices, EFS Sales are forecasted to witness more than 10 folds jump, which will be the main cause behind the 14.1% surge in consolidated Sales. In addition, the plant’s Sales are expected to jump by around 131% in 2011, as a result of the expanded capacity of flat and long products due to the installation of the DRI unit, taking into consideration that the facility is to start producing flat steel from the beginning of 2011. Thus, EFS Sales will severely affect the Group’s Sales in the first three years of the forecasted period. Sales of EFS are anticipated to incline at reasonable rates represented by 4.5% and 1.9% in 2012 and 2013, respectively.

Costs

The Group’s COGS/Sales ratio reached high levels in 2008, negatively influenced by the world financial crisis. In 2007, the ratio on the consolidated level was around 73%. In 2008, the ratio jumped to 77%, which was attributed to the increase in raw materials prices in the beginning of 2008, triggered by accelerating demand, as mentioned earlier. After the financial crisis, the high cost inventory resulted in huge inclines in the Group’s COGS. The COGS/Sales ratio is forecasted to reach 79.9% over the first year of the projection period, due to the high cost stocks, and then to ease by 2010, with the expected rebound in the economic conditions, to be 74.7%. The ratio is forecasted to fall further to 72.7% in 2011, with the installation of the DRI unit in EFS facility and its impact on decreasing the costs of production. COGS/Sales are to reach around 70% in the last two years of the forecasted period.

Chart 79: Forecasted Consolidated Sales Value and COGS/Sales Ratio


Expected Costs Incurred by Subsidiaries

EZDK

As aforementioned, the Company’s COGS/Sales jumped to 82.5% in the first quarter of 2009, compared to 61.1% in 2008. The reason for such jump was the high cost of inventory

-

5,000

10,000

15,000

20,000

25,000

2008 2009 F 2010 F 2011 F 2012 F 2013 F

LEmn

64%

66%

68%

70%

72%

74%

76%

78%

80%

82%

Sales value COGS/Sales



acquired over the period. Accordingly, the COGS/Sales are expected to reach 73% over the year. Afterwards, the ratio is to remain sover the forecasted period at around 61%, assuming the negative implications of the world financial crisis will fade away.

ESR/ESM

The Company’s COGS/Sales ratio reached around 96% in 2008. We project that the ratio will decline in 2009, to reach around 92%, after the effects of the high cost inventory disappear, and then to remain constant at that rate over the forecasted period.

EFS

Affected by the world financial crisis, the Company’s COGS/Sales ratio jumped from 86.6% in 2007 to 94.1% in 2008. The decline of demand for flat steel worldwide, the plummeting prices, along with the high fixed costs urged the Company to temporarily close its facility until demand bounces back. We assumed the COGS/Sales ratio to reach 113.5% in 2009, as a result of the high fixed costs reported in the Q1 2009 results. However, as the facility is expected to restart operations by 2010, the COGS/Sales ratio is expected to decline reaching 91% and further to 73.8% in 2011 in line with the use of the DRI. Afterwards, the ratio is expected to decline to 65.1%. It is worth mentioning that EFS contribute the most in the decline of the Group’s costs, due to the switch in the use of raw materials from scrap to DRI.

Chart 80: Forecasted vs. Historical COGS/Sales Ratio for the Group’s Subsidiaries


SG&A

As for SG&A, on the consolidated level, they are forecasted to hover around 2.5% of Sales over the projection period, which is close to the Group’s historical levels. It is worth mentioning that SG&A are expected to fall by around 36% in 2009, as a result of the closure of EFS.

Other Income Statement assumptions

Interest Expense

The Company’s consolidated interest expense is forecasted to rise over the projection period. In 2008, the Group’s interest expense represented 7.9% of the total interest bearing debt, which included short term and long term loans of the different subsidiaries, financial lease

45%

55%

65%

75%

85%

95%

105%

115%

125%

2008 2009 F 2010 F 2011 F 2012 F 2013 F

EZDK ESR/ESM EFS



reported in EZDK financials and a LE1.1bn bond issued by ESR in May 2008 to early repay the Group’s long term debt and part of its short term debt. The interest rate on the Group’s debt is anticipated to rise in 2009 to 9.4%, mainly due to a new LE2.5bn loan extended to EZDK, which is to be settled over 7 years, with a 2-year grace period. The rate is expected to increase further in 2011 to reach more than 10% until the rest of the forecasted period, as by 2011 EZDK old loans will be settled and the new loan, which has a higher interest rate, will be the only remaining one, which will be the reason for the rise in interest rate on the consolidated level.

Investment Income

The investment income, which comes from long term investments of EZDK, was kept constant at 38% of the subsidiary’s long term investment portfolio, matching the Q1 2009 levels. It is worth mentioning that this income comes mainly from EZDK’s investment in “Contra Steel Company”.

Other Non-Operating Income and Expenses

The non-operating income and expenses were projected as percent of sales for the income and as percent of COGS for the expenses, reflecting the 2008 figures, throughout the projection period.

Profitability Ratios

Based on our assumptions for the Group’s performance, the Group is expected to realize higher profitability ratios over the projection period. The EBITDA and the EBIT margin are forecasted to increase from 2010, after the negative effects of the world recession fade out, as they are expected to reach around 27% and 23%, respectively, by the end of the projection period. The same applies for the return on sales margin, which is expected to incline from 2010, to around 17% approximately by 2013.

Chart 81: Forecasted Profitability Ratios


0%

5%

10%

15%

20%

25%

30%

2008 2009 F 2010 F 2011 F 2012 F 2013 F

EBITDA Margin EBIT Margin ROS



Valuation and Recommendation

Two valuation methodologies were conducted for Al Ezz Steel Rebars Company <ESRS.CA>, the Sum of Parts (SOP) for the subsidiaries’ Discounted Cash Flow (DCF) valuation, together with the EV/EBITDA relative valuation technique to reach a fair value for the stock. We assigned 80% weight to the SOP valuation and 20% to the EV/EBITDA multiplier.

SOP Valuation

We conducted a Sum of Parts DCF valuation for Al Ezz Steel Rebars Company <ESRS.CA> resulting in a total per share fair value of LE21.8, with an upside potential of 72.0% from the current market price at LE12.7 as of the 26th of July 2009.• EZDK contributes the most in the Company’s value,

at LE9.7bn, representing about 81.8% of the total value.

• EFS comes second in terms of contribution to the Company’s total value, to represent 14.7% that is LE1.7bn.

• And finally, ESR/ESM proportionate value at LE0.4bn, contributes to 3.5% of the total value.

Chart 82: Contribution to Total Value


Table 17: Valuation Summary

Subsidiaries

ESRS

Stake

Equity Value

(LE000s)

Proportionate EV

(LE000s) # of Shares

Per Share

Value (LE)

EZDK 53.2% 18,230,129 9,705,720 543,265 17.9

EFS 75.2% 2,322,917 1,745,672 543,265 3.2

ESR/ESM 90.7% 456,608 414,281 543,265 0.8

TOTAL 21,009,654 11,865,673 543,265 21.8Source: Global Research

EZDK Discounted Cash Flow

We have conducted a DCF valuation for Al Ezz Dekheila Steel Company <IRAX.CA>. The DCF model is based on a 5-year (FY2009-FY2013) explicit forecast period for the Free Cash Flow to Firm (FCFF). The terminal value is estimated using the constant growth Gordon Growth Model (GGM). The forecasted cash flow and the terminal value is then discounted at the Company Weighted Average Cost of Capital (WACC). In our DCF valuation, we have used the following assumptions:

Risk Free Rate (T Bonds Feb 2014 Weighted Average YTM) 10.29%

Market Risk 19.79%

Beta 1

Perpetual growth 2.3%

Cost of debt (after tax) 7.1%

ESR/ESM3.49%

EZDK81.80%

EFS14.71%



Under these assumptions, the cost of equity using the Capital Asset Pricing Model (CAPM) reached 19.79% and a WACC of 16.64%, resulting in a total equity value of LE18.2bn.

Table 18: DCF Calculation(LE 000s) 2009 2010 2011 2012 2013

FCFF 2,154,668 2,446,142 3,093,226 3,228,982 3,322,075

Discounted Cash Flow 2,015,766 1,961,940 2,126,963 1,902,721 23,722,601

NPV of CF 8,007,390

NPV of TV 11,984,394

Enterprise Value 19,991,784

Net Debt* (1,761,655)

Equity Value 18,230,129* Debt and Cash are as of the 2009 Q1 results. Source: Global Research

EFS Discounted Cash Flow

We have conducted a DCF valuation for Al Ezz Flat Steel Company. The DCF model is based on a 5-year (FY2009-FY2013) explicit forecast period for the Free Cash Flow to Firm (FCFF). The terminal value is estimated using the constant growth Gordon Growth Model (GGM). The forecasted cash flow and the terminal value is then discounted at the Company Weighted Average Cost of Capital (WACC). In our DCF valuation, we have used the following assumptions:


Market Risk 19.79%

Beta 1





FCFF (1,224,780) (898,046) 753,662 1,105,318 1,176,097

Discounted Cash Flow (1,154,933) (739,411) 541,817 693,571 8,656,998

NPV of CF (658,956)

NPV of TV 4,743,069


Net Debt* (1,761,196)

Equity Value 2,322,917* Debt and Cash are as of the 2009 Q1 results. Source: Global Research

ESR/ESM Discounted Cash Flow

We have conducted a DCF valuation for Al Ezz Steel Mills Company. The DCF model is based on a 5-year (FY2009-FY2013) explicit forecast period for the Free Cash Flow to



Firm (FCFF). The terminal value is estimated using the constant growth Gordon Growth Model (GGM). The forecasted cash flow and the terminal value is then discounted at the Company Weighted Average Cost of Capital (WACC). In our DCF valuation, we have used the following assumptions:


Market Risk 19.79%

Beta 1





FCFF (666,576) 394,355 285,878 301,011 374,172

Discounted Cash Flow (623,896) 316,783 197,092 178,033 2,375,851

NPV of CF 68,011

NPV of TV 1,206,003


Net Debt* (817,407)

Equity Value 456,608* Debt and Cash are as of the 2009 Q1 results. Source: Global Research

Relative Valuation

For the relative valuation, we compared Al Ezz Steel Rebars Company with selected international iron and steel players in terms of 2008 Enterprise Value/Earnings Before Interests, Taxes, Depreciation and Amortization (EV/EBITDA) resulting in an average for the comparable companies of 4.89x, as opposed to 2.54x for Al Ezz Steel Rebars Company. The outcome was a share value of LE19.52 based on Al Ezz Steel Rebars Company 2009 estimated EBITDA.

Table 21: Relative ValuationCompanies EV/EBITDA*

Arcelor Mittal (MT) 5.49

United States Steel Corp. (X) 2.50

AK Steel Holding Corp. (AKS) 6.34

Nucor Corporation (NUE) 5.31

Commercial Metals Co. (CMC) 7.42

POSCO (PKX) 4.53

Companhia Siderurgica Nacional (SID) 6.58

Friedman Industries Inc. (FRD) 0.95

Average 4.89

Al Ezz Steel Rebars 2.54* Based on prices as of July 24th, 2009 for the comparable companies and the 26th of July 2009 for Al Ezz Steel Rebars . Source: Companies Financials and Global Research



A 20% weight was given for the multiple valuation, as the price based multiples are affected by various factors, among these are poles apart market conditions, stock markets dissimilar levels of maturity, which could manipulate the Companies fair value.

Table 22: Weighted Price

Valuation Approach

Fair Value/

Share (LE) Weight

Weighted

Value (LE)

DCF Valuation 21.8 80% 17.5

Peer Group Valuation 19.5 20% 3.9

Estimated Fair Price 21.4

Current Market Price (LE)* 12.7

Upside/(Downside) potential 68.32%* Market price as of July 26th, 2009. Source: Global Research

Combining both methods resulted in a fair value of LE21.4 per share, compared to the current market price (as of July 26th, 2009) at LE10.8 per share, implying an upside potential of 68.3%. Consequently, we initiate our coverage for Al Ezz Steel Rebars Company with a “BUY” recommendation.



Tab

le 2

3: B

alan

ce S

heet

Al E

zz S

teel

Reb

ars

Com

pany

In

LE

000

s20

0520

0620

0720

0820

09 (

F)

2010

(F

)20

11 (

F)

2012

(F

)20

13 (

F)

Ass

ets

Ope

ratin

g C

ash

9,29

8.0

263,

529.

01,

472,

740.

077

2,72

6.0

440,

872.

550

3,23

9.3

623,

505.

564

5,89

2.4

657,

188.

6E

xces

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ash

10,6

88.0

418,

922.

041

9,07

2.0

3,01

6,26

4.0

824,

412.

537

7,61

9.3

584,

556.

083

3,91

3.2

1,61

7,21

0.6

Mar

keta

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s-

116,

298.

062

0.0

301,

276.

030

1,27

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301,

276.

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1,27

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301,

276.

030

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Net

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s R

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312,

601.

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5,40

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122,

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129,

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454,

199.

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206.

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547,

576.

03,

177,

861.

02,

258,

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52,

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62,

907,

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62,

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194.

02,

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435.

97,

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77,

787.

77,

911.

7O

ther

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rent

Ass

ets

142,

516.

045

2,37

0.0

463,

796.

044

4,42

4.0

386,

272.

241

2,26

1.2

497,

253.

149

8,84

8.6

506,

793.

4T

otal

Cur

rent

Ass

ets

856,

131.

04,

130,

387.

05,

177,

021.

07,

780,

614.

04,

304,

373.

94,

110,

579.

75,

044,

757.

85,

331,

852.

66,

183,

194.

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ong

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m L

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06,

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03,

427.

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m I

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6,34

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62,9

73.0

49,0

13.0

49,0

13.0

49,0

13.0

49,0

13.0

49,0

13.0

49,0

13.0

Proj

ects

Und

er I

mpl

emen

tatio

n74

3.0

22,7

72.0

116,

977.

042

1,61

8.0

1,66

3,87

3.6

2,29

1,37

3.6

39,3

73.6

21,3

73.6

6,87

3.6

Gro

ss F

ixed

Ass

ets

:1,

477,

842.

016

,189

,122

.016

,128

,336

.016

,309

,708

.016

,503

,708

.017

,049

,708

.019

,361

,208

.019

,428

,708

.019

,492

,708

.0L

ess

: Acc

. Dep

reci

atio

n56

5,44

3.0

5,02

5,99

1.0

5,64

3,72

5.0

6,28

9,30

6.0

6,94

8,94

9.8

7,63

7,62

7.2

8,41

3,86

4.4

9,22

1,75

8.2

10,0

14,0

11.7

Net

Fix

ed A

sset

s91

2,39

9.0

11,1

63,1

31.0

10,4

84,6

11.0

10,0

20,4

02.0

9,55

4,75

8.2

9,41

2,08

0.8

10,9

47,3

43.6

10,2

06,9

49.8

9,47

8,69

6.3

Goo

dwill

--

-31

5,21

4.0

315,

214.

031

5,21

4.0

315,

214.

031

5,21

4.0

315,

214.

0T

otal

Ass

ets

2,71

4,43

0.0

15,3

31,4

25.0

15,8

47,6

03.0

18,5

90,2

88.0

15,8

90,6

59.7

16,1

81,6

88.0

16,3

99,1

29.1

15,9

27,8

30.1

16,0

36,4

18.7

Lia

bilit

ies

& S

hare

hold

er’s

Equ

ity

Shor

t Ter

m D

ebt

11,1

29.0

668,

107.

01,

355,

855.

01,

889,

775.

033

2,70

7.6

777,

734.

254

4,26

0.3

86,5

37.1

88,3

28.2

CPL

TD

669,

619.

01,

818,

940.

01,

930,

041.

02,

037,

821.

081

2,81

5.4

812,

815.

493

2,32

4.6

764,

962.

963

2,75

5.6

Acc

ount

s Pa

yabl

e10

2,94

3.0

523,

464.

071

5,58

0.0

831,

308.

076

9,97

8.4

821,

783.

899

1,20

2.9

994,

383.

41,

010,

220.

1A

ccru

ed E

xpen

ses

37,8

85.0

262,

134.

023

8,05

5.0

171,

538.

069

5,31

2.9

742,

094.

789

5,08

5.1

897,

957.

291

2,25

8.2

Dow

n Pa

ymen

t11

4,35

6.0

573,

803.

061

6,33

0.0

952,

186.

063

4,35

7.7

724,

095.

489

7,14

2.6

929,

354.

594

5,60

8.2

Tax

es P

ayab

le-

490,

368.

049

1,65

7.0

687,

270.

029

0,56

1.5

447,

813.

260

3,71

1.6

739,

969.

478

6,56

0.4

Due

s T

o A

ffili

ates

8,56

7.0

691.

05,

429.

01,

183.

069

8.1

745.

189

8.7

901.

591

5.9

Div

iden

ds P

ayab

le66

1.0

12,6

01.0

421,

295.

047

7,40

7.0

--

--

-O

ther

Cur

rent

Lia

bilit

ies

21,4

66.0

59,8

28.0

119,

327.

074

,624

.047

,050

.850

,216

.560

,569

.160

,763

.561

,731

.2T

otal

Cur

rent

Lia

bilit

ies

966,

626.

04,

409,

936.

05,

893,

569.

07,

123,

112.

03,

583,

482.

44,

377,

298.

24,

925,

195.

04,

474,

829.

54,

438,

377.

8T

otal

Lon

g T

erm

Deb

t81

6,99

4.0

4,90

2,12

9.0

3,89

2,11

7.0

2,63

5,92

3.0

4,34

6,35

8.3

3,55

6,79

3.0

2,64

7,71

8.5

1,88

2,75

5.6

1,25

0,00

0.0

Fina

ncia

l Lea

se-

142,

167.

010

0,09

7.0

69,7

50.0

46,5

00.2

23,2

50.1

--

-B

onds

--

-1,

100,

000.

01,

100,

000.

01,

100,

000.

01,

100,

000.

01,

100,

000.

01,

100,

000.

0Pr

ovis

ions

For

Def

erre

d T

axes

28,8

14.0

351,

683.

051

3,02

6.0

572,

052.

059

1,08

9.2

621,

940.

065

6,62

1.9

694,

617.

673

4,24

2.2

Oth

er P

rovi

sion

s-

208,

294.

051

,886

.048

,408

.048

,408

.048

,408

.048

,408

.048

,408

.048

,408

.0O

ther

Non

-Cur

rent

Lia

bilit

ies

1,78

0.0

167,

013.

095

,534

.010

3,84

9.0

89,7

64.2

95,8

03.7

115,

554.

611

5,92

5.4

117,

771.

7T

otal

Lia

bilit

ies

1,81

4,21

4.0

10,1

81,2

22.0

10,5

46,2

29.0

11,6

53,0

94.0

9,80

5,60

2.3

9,82

3,49

3.0

9,49

3,49

8.1

8,31

6,53

6.1

7,68

8,79

9.6

Min

ority

Int

eres

t1,

641.

02,

283,

266.

01,

970,

949.

01,

757,

283.

01,

599,

503.

81,

730,

054.

42,

016,

670.

82,

385,

562.

42,

766,

675.

2N

et P

aid-

In C

apita

l39

4,11

6.0

875,

677.

087

6,05

7.0

2,64

4,40

4.0

2,64

4,40

4.0

2,64

4,40

4.0

2,64

4,40

4.0

2,64

4,40

4.0

2,64

4,40

4.0

Leg

al &

Sta

tuto

ry R

eser

ves

18,5

97.0

41,1

14.0

126,

616.

017

9,15

9.0

211,

221.

225

3,45

0.1

309,

793.

637

8,63

7.8

456,

054.

4G

ener

al &

Oth

er R

eser

ves

-53

2,68

6.0

492,

271.

049

0,03

0.0

490,

030.

049

0,03

0.0

490,

030.

049

0,03

0.0

490,

030.

0R

etai

ned

Ear

ning

s35

,521

.046

3,20

9.0

997,

623.

01,

862,

181.

01,

139,

898.

41,

240,

256.

51,

444,

732.

61,

712,

659.

81,

990,

455.

5N

et P

rofi

t/Los

s of

the

year

(le

ss q

uart

erly

div

iden

ds)

450,

341.

095

4,25

1.0

837,

858.

04,

137.

0Sh

areh

olde

rs’

Equ

ity

900,

216.

05,

150,

203.

05,

301,

374.

06,

937,

194.

06,

085,

057.

46,

358,

195.

06,

905,

631.

07,

611,

294.

08,

347,

619.

1T

otal

Lia

bilit

ies

and

Equ

ity

2,71

4,43

0.0

15,3

31,4

25.0

15,8

47,6

03.0

18,5

90,2

88.0

15,8

90,6

59.7

16,1

81,6

88.0

16,3

99,1

29.1

15,9

27,8

30.1

16,0

36,4

18.7

Sour

ce:

Com

pany

Fin

anci

als

and

Glo

bal R

esea

rch



Tab

le 2

4: I

ncom

e St

atem

ent

Al E

zz S

teel

Reb

ars

Com

pany

In

LE

000

s 20

0520

0620

0720

0820

09 (

F)

2010

(F

)20

11 (

F)

2012

(F

)20

13 (

F)

Rev

enue

s fr

om O

pera

tion

3,12

3,16

5.0

11,6

43,1

16.0

16,1

59,3

80.0

21,7

92,0

31.0

12,4

33,2

64.5

14,1

92,1

02.3

17,5

83,7

87.9

18,2

15,1

34.2

18,5

33,7

02.7

CO

GS

2,83

5,67

4.0

7,85

0,44

1.0

11,8

51,1

87.0

16,8

33,7

01.0

9,93

3,50

6.6

10,6

01,8

49.4

12,7

87,5

29.1

12,8

28,5

60.2

13,0

32,8

69.9

S. ,

G. &

Adm

. Exp

ense

s39

,918

.021

0,55

2.0

370,

925.

051

9,17

3.0

331,

522.

333

6,09

0.6

436,

017.

045

8,28

3.7

483,

271.

6E

BIT

DA

247,

573.

03,

582,

123.

03,

937,

268.

04,

439,

157.

02,

168,

235.

63,

254,

162.

44,

360,

241.

94,

928,

290.

25,

017,

561.

2D

epre

ciat

ion

72,3

33.0

561,

326.

065

9,42

7.0

659,

185.

065

9,64

3.8

688,

677.

477

6,23

7.1

807,

893.

879

2,25

3.5

Ope

rati

ng P

rofi

t -E

BIT

175,

240.

03,

020,

797.

03,

277,

841.

03,

779,

972.

01,

508,

591.

82,

565,

484.

93,

584,

004.

84,

120,

396.

44,

225,

307.

7In

tere

st I

ncom

e16

6.0

31,4

90.0

66,6

60.0

130,

159.

022

8,56

2.2

62,4

71.2

28,6

14.7

44,2

95.7

63,1

91.1

Inve

stm

ent I

ncom

e49

7,56

5.0

6,16

7.0

--

18,8

13.3

18,8

13.3

18,8

13.3

18,8

13.3

18,8

13.3

Inte

rest

Exp

ense

226,

986.

057

0,10

3.0

709,

601.

059

0,51

9.0

676,

819.

659

1,33

8.5

611,

454.

548

5,25

7.5

376,

284.

4O

ther

Pro

visi

ons

-81

,679

.05,

955.

0-

--

--

-O

ther

Non

-Ope

ratin

g In

com

e39

,295

.015

3,60

8.0

245,

768.

011

4,61

8.0

65,3

94.4

74,6

45.2

92,4

84.2

95,8

04.8

97,4

80.4

Oth

er N

on-O

pera

ting

Exp

ense

s5,

000.

08,

863.

0-

123,

617.

072

,945

.977

,853

.993

,904

.294

,205

.695

,705

.9N

et P

rofi

t B

efor

e T

ax48

0,28

0.0

2,55

1,41

7.0

2,87

4,71

3.0

3,31

0,61

3.0

1,07

1,59

6.0

2,05

2,22

2.1

3,01

8,55

8.2

3,69

9,84

7.2

3,93

2,80

2.2

Inco

me

Tax

-48

8,23

2.0

491,

657.

068

7,27

0.0

290,

561.

544

7,81

3.2

603,

711.

673

9,96

9.4

786,

560.

4D

efer

red

Tax

28,8

14.0

122,

965.

016

1,34

4.0

59,0

26.0

19,0

37.2

30,8

50.8

34,6

81.9

37,9

95.7

39,6

24.6

Net

Pro

fit

Aft

er T

ax45

1,46

6.0

1,94

0,22

0.0

2,22

1,71

2.0

2,56

4,31

7.0

761,

997.

31,

573,

558.

12,

380,

164.

62,

921,

882.

03,

106,

617.

2C

apita

l Gai

n/L

oss

-11

,614

.0(8

2.0)

409.

0-

--

--

Min

ority

Int

eres

t1,

125.

095

6,97

4.0

1,09

9,67

4.0

1,34

1,37

6.0

406,

722.

875

7,65

3.4

1,01

0,91

3.3

1,17

8,14

6.0

1,23

3,78

6.6

Net

Pro

fit

Aft

er U

nusu

al I

tem

s45

0,34

1.0

994,

860.

01,

121,

956.

01,

223,

350.

035

5,27

4.5

815,

904.

71,

369,

251.

31,

743,

736.

01,

872,

830.

6So

urce

: C

ompa

ny F

inan

cial

s an

d G

loba

l Res

earc

h

Tab

le 2

5: A

ppro

pria

tion

Sta

tem

ent

In L

E 0

00s

2006

2007

2008

2009

(F

)20

10 (

F)

2011

(F

)20

12 (

F)

2013

(F

)O

p B

alan

ce o

f R

etai

ned

Ear

ning

s46

3,20

999

7,62

31,

862,

181

1,12

9,66

11,

139,

898

1,24

0,25

71,

444,

733

1,71

2,66

0N

PAT

994,

860

1,12

1,95

61,

223,

350

355,

275

815,

905

1,36

9,25

11,

743,

736

1,87

2,83

1L

egal

Res

erve

48,1

3837

,364

66,6

2232

,062

42,2

2956

,344

68,8

4477

,417

Gen

eral

Res

erve

--

--

--

--

Com

mon

Div

iden

d18

2,31

218

2,38

81,

792,

775

266,

546

612,

166

1,02

6,84

11,

307,

272

1,40

5,51

2E

mpl

oyee

s re

mun

erat

ion

20,2

5720

,265

96,4

7446

,429

61,1

5181

,590

99,6

9311

2,10

6B

oard

of

dire

ctor

s-

--

--

--

-B

alan

ce C

arri

ed F

orw

ard

1,20

7,36

11,

879,

562

1,12

9,66

11,

139,

898

1,24

0,25

71,

444,

733

1,71

2,66

01,

990,

456

Sour

ce:

Com

pany

Fin

anci

als

and

Glo

bal R

esea

rch



Tab

le 2

6: C

ash

Flo

w S

tate

men

tA

l Ezz

Ste

el R

ebar

s C

ompa

ny

In L

E 0

00s

2005

2006

2007

2008

2009

(F

)20

10 (

F)

2011

(F

)20

12 (

F)

2013

(F

)O

pera

ting

Net

Pro

fit A

fter

Unu

sual

Ite

ms

450,

341.

099

4,86

0.0

1,12

1,95

6.0

1,22

3,35

0.0

355,

274.

581

5,90

4.7

1,36

9,25

1.3

1,74

3,73

6.0

1,87

2,83

0.6

Dep

reci

atio

n72

,333

.056

1,32

6.0

659,

427.

065

9,18

5.0

659,

643.

868

8,67

7.4

776,

237.

180

7,89

3.8

792,

253.

5Pr

ovis

ion

-81

,679

.05,

955.

0-

--

--

-Fi

nanc

e co

sts

226,

986.

057

0,10

3.0

709,

601.

059

0,51

9.0

676,

819.

659

1,33

8.5

611,

454.

548

5,25

7.5

376,

284.

4In

tere

st in

com

e(1

66.0

)(3

1,49

0.0)

(66,

660.

0)(1

30,1

59.0

)(2

28,5

62.2

)(6

2,47

1.2)

(28,

614.

7)(4

4,29

5.7)

(63,

191.

1)C

apita

l los

ses/

(gai

ns)

-(1

1,61

4.0)

82.0

(409

.0)

--

--

-In

vest

men

t Inc

ome

(497

,565

.0)

(6,1

67.0

)-

-(1

8,81

3.3)

(18,

813.

3)(1

8,81

3.3)

(18,

813.

3)(1

8,81

3.3)

Min

ority

Int

eres

t1,

125.

095

6,97

4.0

1,09

9,67

4.0

1,34

1,37

6.0

406,

722.

875

7,65

3.4

1,01

0,91

3.3

1,17

8,14

6.0

1,23

3,78

6.6

Inco

me

Tax

-48

8,23

2.0

491,

657.

068

7,27

0.0

290,

561.

544

7,81

3.2

603,

711.

673

9,96

9.4

786,

560.

4D

efer

red

Tax

28,8

14.0

122,

965.

016

1,34

4.0

59,0

26.0

19,0

37.2

30,8

50.8

34,6

81.9

37,9

95.7

39,6

24.6

Ope

ratin

g pr

ofit

befo

re w

orki

ng c

apita

l cha

nges

281,

868.

03,

726,

868.

04,

183,

036.

04,

430,

158.

02,

160,

684.

03,

250,

953.

74,

358,

821.

94,

929,

889.

55,

019,

335.

7(I

ncre

ase)

/dec

reas

e in

inve

ntor

y(4

54,1

99.0

)(2

,111

,007

.0)

17,6

30.0

(630

,285

.0)

918,

997.

5(1

51,9

80.1

)(4

97,0

20.0

)(9

,330

.4)

(46,

459.

7)(I

ncre

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/dec

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& o

ther

s(3

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)(3

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(38,

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)(6

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(10,

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pro

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se/(

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) in

pay

able

s &

oth

ers

285,

217.

01,

136,

839.

0(2

15,5

67.0

)(1

55,5

39.0

)(5

70,7

11.1

)(9

9,02

4.0)

58,1

49.8

(565

,250

.0)

(692

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.9)

Cas

h ge

nera

ted

from

ope

rati

ons

(269

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.0)

2,36

8,21

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4,01

4,51

8.0

3,86

8,86

0.0

2,54

2,50

8.0

2,96

1,29

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3,80

9,99

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ided

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)2,

368,

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518.

03,

868,

860.

02,

542,

508.

02,

961,

297.

63,

809,

996.

44,

349,

288.

94,

269,

991.

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vest

ing

Purc

hase

of

fixe

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sets

(984

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10,8

12,0

58.0

)19

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.0(1

94,9

76.0

)(1

94,0

00.0

)(5

46,0

00.0

)(2

,311

,500

.0)

(67,

500.

0)(6

4,00

0.0)

Dis

posa

l of

fixe

d as

sets

Con

stru

ctio

n w

orks

in p

rogr

ess

(743

.0)

(22,

029.

0)(9

4,20

5.0)

(304

,641

.0)

(1,2

42,2

55.6

)(6

27,5

00.0

)2,

252,

000.

018

,000

.014

,500

.0G

oodw

ill-

--

(315

,214

.0)

--

--

-O

ther

long

term

ass

ets

(1,0

19.0

)(7

,776

.0)

2,77

4.0

2,59

4.0

--

--

-C

hang

e in

inve

stm

ents

(446

,573

.0)

943,

965.

0(5

6,63

3.0)

13,9

60.0

18,8

13.3

18,8

13.3

18,8

13.3

18,8

13.3

18,8

13.3

Net

cas

h fr

om in

vest

ing

acti

viti

es(1

,433

,067

.0)

(9,8

97,8

98.0

)(1

28,9

71.0

)(7

98,2

77.0

)(1

,417

,442

.3)

(1,1

54,6

86.7

)(4

0,68

6.7)

(30,

686.

7)(3

0,68

6.7)

Fin

anci

ngIn

crea

sed

in c

apita

l39

4,11

6.0

481,

561.

038

0.0

1,76

8,34

7.0

--

--

-R

ecei

pts

from

lon

g te

rm lo

ans

& li

abili

ties

1,52

8,33

6.0

6,64

8,31

8.0

(325

,732

.0)

519,

022.

0(1

,089

,935

.1)

(330

,898

.5)

(991

,856

.4)

(1,3

51,6

81.4

)(7

21,7

01.0

)D

ivid

ends

pai

d54

,118

.049

1,94

1.0

(658

,848

.0)

(1,1

42,2

11.0

)(1

,049

,632

.0)

(673

,317

.7)

(1,1

08,4

31.7

)(1

,406

,964

.7)

(1,5

17,6

18.2

)M

inor

ity I

nter

est

516.

01,

324,

651.

0(1

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.0)

(1,5

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)(5

64,5

02.0

)(6

27,1

02.8

)(7

24,2

96.9

)(8

09,2

54.4

)(8

52,6

73.8

)In

crea

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decr

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div

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le66

1.0

11,9

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408,

694.

056

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77,4

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409.

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--

--

Inte

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inco

me

166.

031

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0,15

9.0

228,

562.

262

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efer

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Tax

(28,

814.

0)(1

22,9

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61,3

44.0

)(5

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(19,

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2)(3

0,85

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(34,

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st p

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(226

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(570

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(709

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(590

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(676

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(591

,338

.5)

(611

,454

.5)

(485

,257

.5)

(376

,284

.4)

Net

cas

h fr

om f

inan

cing

act

ivit

ies

1,72

2,11

3.0

8,30

8,44

7.0

(2,7

91,8

64.0

)(8

72,7

49.0

)(3

,648

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.7)

(2,1

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37.2

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.8)

(4,0

46,8

58.0

)(3

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.9)

Cas

h at

the

begi

nnin

g of

the

year

-19

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8,74

9.0

1,89

2,43

2.0

4,09

0,26

6.0

1,56

6,56

0.9

1,18

2,13

4.6

1,50

9,33

7.5

1,78

1,08

1.6

Add

: Net

incr

ease

in c

ash

19,9

86.0

778,

763.

01,

093,

683.

02,

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0(2

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(384

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327,

202.

827

1,74

4.1

794,

593.

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ash

at th

e en

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the

year

19,9

86.0

798,

749.

01,

892,

432.

04,

090,

266.

01,

566,

560.

91,

182,

134.

61,

509,

337.

51,

781,

081.

62,

575,

675.

2So

urce

: C

ompa

ny F

inan

cial

s an

d G

loba

l Res

earc

h



Tab

le 2

7: F

act

Shee

tA

l Ezz

Ste

el R

ebar

s C

ompa

ny

20

0520

0620

0720

0820

09 (

F)

2010

(F

)20

11 (

F)

2012

(F

)20

13 (

F)

Pro

fita

bilit

yG

ross

Pro

fit M

argi

n9.

2%32

.6%

26.7

%22

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20.1

%25

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27.3

%29

.6%

29.7

%E

BIT

DA

Mar

gin

7.9%

30.8

%24

.4%

20.4

%17

.4%

22.9

%24

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27.1

%27

.1%

Ope

ratin

g M

argi

n5.

6%25

.9%

20.3

%17

.3%

12.1

%18

.1%

20.4

%22

.6%

22.8

%N

et P

rofi

t Mar

gin

(Bef

ore

Tax

)15

.4%

21.9

%17

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15.2

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6%14

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17.2

%20

.3%

21.2

%N

et P

rofi

t Mar

gin

(Aft

er T

ax)

14.5

%16

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13.7

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6.1%

11.1

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16.0

%16

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Tur

nove

r ra

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ntor

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404.

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37.2

560

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376.

7414

3.49

143.

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3.49

143.

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3.49

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turn

over

20.1

46.

158.

209.

965.

665.

275.

144.

874.

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et w

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l tur

nove

r(2

8.27

)(4

1.65

)(2

2.55

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3.21

)14

7.07

21.2

510

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GFA

turn

over

0.47

1.39

1.00

0.75

1.33

1.20

1.10

1.07

1.05

NFA

turn

over

0.29

0.96

0.65

0.46

0.77

0.66

0.62

0.56

0.51

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et tu

rnov

er0.

871.

320.

980.

851.

281.

140.

930.

870.

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ever

age

Rat

ios

Deb

t/Tot

al A

sset

s55

.2%

49.1

%45

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41.6

%41

.8%

38.8

%31

.9%

24.1

%19

.2%

Deb

t/Equ

ity55

.2%

49.1

%45

.9%

41.6

%41

.8%

38.8

%31

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24.1

%19

.2%

Inte

rest

cov

erag

e0.

85.

44.

76.

62.

64.

45.

98.

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n R

atio

sR

etur

n on

ave

rage

ass

ets

16.6

%21

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14.3

%14

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4.4%

9.8%

14.6

%18

.1%

19.4

%R

etur

n on

ave

rage

equ

ity16

.6%

12.7

%14

.0%

13.8

%4.

8%9.

7%14

.5%

18.3

%19

.4%

Ret

urn

on in

vest

ed c

apita

l11

.9%

34.1

%21

.2%

24.5

%9.

3%16

.5%

23.8

%29

.3%

32.4

%V

alua

tion

Rat

ios

Num

ber

of S

hare

s (0

00s)

86,0

00.0

182,

312.

318

2,38

8.2

543,

265.

054

3,26

5.0

543,

265.

054

3,26

5.0

543,

265.

054

3,26

5.0

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ket C

ap a

s at

yea

r en

d (L

E00

0s)

1,96

0,80

0.0

3,00

8,15

2.5

4,04

9,01

7.9

4,72

6,40

5.7

6,89

9,46

5.8

6,89

9,46

5.8

6,89

9,46

5.8

6,89

9,46

5.8

6,89

9,46

5.8

Mar

ket P

rice

(L

E a

t per

iod

end)

22.8

16.5

22.2

8.7

12.7

12.7

12.7

12.7

12.7

Div

iden

d an

noun

ced

(L

E/S

hare

)-

1.0

1.0

3.3

0.5

1.1

1.9

2.4

2.6

Div

iden

d yi

eld

0.0%

6.1%

4.5%

37.9

%3.

9%8.

9%14

.9%

18.9

%20

.4%

Div

iden

d pa

yout

rat

io0.

0%18

.5%

16.3

%14

6.6%

75.0

%75

.0%

75.0

%75

.0%

75.0

%E

arni

ngs

per

shar

e (L

E)

5.2

5.4

6.2

2.3

0.7

1.5

2.5

3.2

3.4

Boo

k V

alue

per

sha

re (

LE

)31

.684

.186

.934

.229

.329

.830

.229

.329

.5Pr

ice

to E

arni

ngs

(tim

es)

4.35

3.06

3.61

3.86

19.4

28.

465.

043.

963.

68E

V/E

BIT

DA

(tim

es)

13.8

92.

722.

401.

895.

523.

682.

431.

821.

47E

V/S

ales

(tim

es)

1.10

0.84

0.58

0.38

0.96

0.84

0.60

0.49

0.40

EV

/Ton

(L

E)

N.A

2,02

61,

933

1,81

03,

028

2,70

32,

017

1,68

61,

386

EV

/Ton

(U

S$)

N.A

353

343

333

540

482

359

300

247

Pric

e to

boo

k va

lue

(tim

es)

0.72

0.20

0.26

0.25

0.43

0.43

0.42

0.43

0.43

Sour

ce:

Com

pany

Fin

anci

als

and

Glo

bal R

esea

rch

His

tori

cal P

/E &

P/B

V m

ultip

les

base

d on

res

pect

ive

year

-end

pri

ces,

whi

le th

at fo

r fu

ture

yea

rs a

re b

ased

on

curr

ent m

arke

t pri

ce in

the

EG

X a

s of

Jul

y 26

th, 2

009.



Al Ezz Dekheila Steel Company – Alexandria (EZDK) Tickers:IRAX.CA (Reuters)IRAX:EY (Bloomberg)Listing: The Egyptian Exchange (EGX)Fair Value: LE1,209.9Current Market Price: LE740.0 (As of July 26th, 2009)

Investment Summary

- Al Ezz Dekheila Steel Company – Alexandria S.A.E (EZDK) <IRAX.CA> is an Egyptian Joint Stock Company majority owned by Al Ezz Steel Rebars Company (Ezz Steel) and is considered to have one of the leading steel producing facilities in Egypt and the Middle East.

- In 1999, Ezz Steel was able to finalize the purchase of a stake of 21% approximately in the Company and added it to its portfolio of subsidiaries and the Company became known as Al Ezz Dekheila Steel Company. Moreover, as the privatization process continued in Egypt, Ezz Steel was able to raise its stake substantially until it acquired a 53.2% stake in the company in 2008. Ezz Steel’s acquisition of EZDK created an operational synergy that enhanced the performance and efficiency of Ezz Steel’s plants.

- Since its inception, EZDK has always been able to achieve impressive operational efficiency levels and produce high quality steel that met the toughest of international standards. By the end of 2008, EZDK had a total production capacity of 2.7mn tons, classified into 1.7mn tons of long products and 1mn tons of flat products. These capacities make EZDK the largest steel producing company in Egypt and the best performer in the portfolio of subsidiaries of Al Ezz Steel Rebars.

- Originally, EZDK produced only long steel products such as reinforcement bars (rebars) used in construction and building activities. However, after the Company’s acquisition by Ezz Steel, EZDK began producing flat products in 2000, specifically Hot Rolled Coils. Moreover, EZDK produces the HRC using both the Compact Strip Production (CRS) and the flexible Thin Slab Casting and Rolling (fTSCR), which are among the most sophisticated and advanced methods in the world.

- The total production of EZDK had a modest decline of 1% in 2008, as it reached 2.51mn tons, as opposed to 2.53mn tons a year earlier. This was primarily a consequence of the 10% reduction in flat steel production, due to the impoverished international demand over flat steel products worldwide on the back of the financial crisis, as it declined from 775 thousand tons in 2007 to 695 thousand tons in 2008. As for long products, output rose by 3% Y-o-Y, as it moved up from1,759 thousand tons to 1,812 thousand tons.

- The dynamics of both the domestic and global markets affected the Company’s sales in 2008, where the volumes sold tumbled by 4.6% Y-o-Y. This came on the back of the

July, 2009

BUY



lower exported quantities, which fell by 44.9% over the year, from 544 thousand tons to 300 thousand tons. As demand for long steel products dipped steeply all over the world in the second half of 2008, the Company exported only 18 thousand tons, down from 182 tons exported the previous year, a 90.1% Y-o-Y slump. As for flat steel exports, they also fell but with a lower rate, as they decreased by 80 thousand tons, reaching 282 thousand tons in 2008, and representing a decline of 22.1%.

- As for the first quarter of 2009, the Company’s total sales volumes fell by 2.7% Y-o-Y, reaching 692 thousand tons, down from 711 thousand tons sold in the same period of the previous year. This was attributed to the 9.6% decrease in exports, from 125 thousand tons to 113 thousand tons, which was in turn a result of a 72.2% drop in exported rebars. On the other hand, the Company’s exported quantities of flat steel in Q1 2009 were almost the same as those exported in Q1 2008.

- The Company’s bottom line reached LE3.0bn in 2008, representing an impressive 29.2% rise over 2007. It is worth mentioning that there were extraordinary items, represented by compensation for losses incurred due to the electricity transformer accident in the flat facility in 2007, capital gains and reimbursement of loans extended to the employees union in 2008. Net profit after excluding these items witnessed a surge of 30.8% over the year. This was primarily due to the acceleration of Sales, the 55.7% increase in interest income and the 30.9% drop in interest expense.

- Q1 2009 profit slumped by 76.3% Y-o-Y, on the back of the decline in Sales, along with the surge in COGS.

- We initiate our coverage of Al Ezz Dekheila Steel Company – Alexandria (EZDK) with a ‘BUY’ recommendation. Based on the combination of Discounted Cash Flow Method, Dividend Discount Model Method and Peer Group Valuation Method, we have valued the Company’s shares at an intrinsic value of LE1,209.9 per share, with a 63.5% premium over the current market price (as of July 26th, 2009) of LE740.0 per share.

Table 28: Investment Indicators for Al Ezz Dekheila Steel Company – Alexandria (EZDK)CMP (LE) Shares in Issue (mn) M-Cap (LE mn) 52-Week Hi/Lo (LE)

740.0 13.4 9,889.7 1,525.0 580.0

Year Gross Profit

(LE mn)

Net Profit

(LE mn)

EPS

(LE)

BVPS

(LE)

ROAE

(%)

P/E

(x)

P/BV

(x)

2010 F 3,106.7 1,722.9 128.9 644.4 19.97% 5.74 1.15

2009 F 2,180.3 1,064.9 79.7 647.0 11.27% 9.29 1.14

2008 A 4,524.6 2,934.9 219.6 767.2 30.29% 3.36 0.96

2007 A 3,541.6 2,243.2 164.1 667.6 25.42% 4.95 1.22 Source: Company’s Annual Reports, Mubasher and Global Research.Historical P/E & P/BV multiples based on respective year-end prices, while that for future years are based on current market price in the EGX as of July 26th, 2009.

Share info

Al Ezz Dekheila Steel Company – Alexandria <IRAX.CA> was listed on the Egyptian Exchange in September 1995 and ever since its share has been actively traded, mainly among institutional investors.



Chart 83: EZDK Share (IRAX.CA) Price Performance versus EGX30 Index

Source: Mubasher, Global Research

What’s against the stock?

Despite the strong fundamentals of EZDK stock and the abnormally high dividend yield, the stock is not amongst the highly traded shares on the Egyptian exchange. This comes as a result of several factors.

The high dividend yield, which reaches 35%, makes the stock favorable to institutions that hold the share.

Also, the low flotation of 9.3% represents an obstacle for active trading on the stock, since it is mostly held by institutions for its high dividend yield.

Moreover, the psychological barrier created at the retail investors’ level that the share price is expensive, makes the stock less favorable for the short term investors and speculators.

Table 29: Liquidity of EZDK StockParticulars 2006 2007 2008 Q1 2009

Volume of Shares Traded (000s) 7,208.3 1,499.3 3,876.8 136.6

% of Total Market 0.1% 0.0% 0.0% 0.0%

Value Traded (LE000s) 8,188,157.1 1,519,881.0 4,934,489.2 90,899.8

% of Total Market 3.0% 0.5% 1.0% 0.2%

Market Price (LE) at period end 643.4 812.4 738.2 616.1

Market Capitalization (LE000s) 8,793,294.6 11,103,967.3 9,865,342.4 8,234,349.4

% of Total Market 1.6% 1.4% 2.1% 2.1%Source: Mubasher and Global Research

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

1/2/

06

3/2/

06

5/2/

06

7/2/

06

9/2/

06

11/2

/06

1/2/

07

3/2/

07

5/2/

07

7/2/

07

9/2/

07

11/2

/07

1/2/

08

3/2/

08

5/2/

08

7/2/

08

9/2/

08

11/2

/08

1/2/

09

3/2/

09

5/2/

09

7/2/

09

LE

IRAX EGX30 rebased



Company Overview

Background

Al Ezz Dekheila Steel Company – Alexandria S.A.E (EZDK) <IRAX.CA> is an Egyptian Joint Stock Company majority owned by Al Ezz Steel Rebars Company (Ezz Steel) and is considered to have one of the leading steel producing facilities in Egypt and the Middle East. The Company was originally created as a Joint Investment Company formerly known as Alexandria National Company for Iron and Steel (ANSDK).

In the early 70s, Egypt had a massive steel shortage problem, as imported steel rebars were not able to meet the local demand. However, the discovery of natural gas on the offshore of Alexandria presented the Egyptian government with new means to help overcome this problem through the introduction of a steel plant based on DRI. In 1976, the International Finance Corporation (IFC) presented the initiative to create a steel complex in Al Dekheila, Alexandria, by proposing the incorporation of a Joint Investment Company. There on, in 1982, a venture was created by a group of Egyptian banks and a Japanese consortium and the Alexandria National Company for Iron and Steel was born, where the purpose of the company was to produce and manufacture all kinds of steel.

ANSDK commenced its operations in 1986 as an integrated steel mill, producing reinforcing rebars from imported oxide pellets with an initial capacity of 0.75mn tons and later on, the company started producing flat steel.

In 1999, Ezz Steel was able to finalize the purchase of a stake of 21% approximately in the Company and added it to its portfolio of subsidiaries and the Company became known as Al Ezz Dekheila Steel Company. Moreover, as the privatization process continued in Egypt in the millennium, Ezz Steel was able to raise its stake substantially until it acquired a 53.2% stake in the company in 2008. Ezz Steel’s acquisition of EZDK created an operational synergy that enhanced the performance and efficiency of Ezz Steel’s plants.

Since its inception, EZDK has always been able to achieve impressive operational efficiency levels and produce high quality steel that met the toughest of international standards. By the end of 2008, EZDK had a total production capacity of 2.7mn tons, classified into 1.7mn tons of long products and 1mn tons of flat products. These capacities make EZDK the largest steel producing company in Egypt and the best performer in the portfolio of subsidiaries of Al Ezz Steel Rebars.

Management

The Company is owned by Ezz Steel holding company and so, is controlled and managed by Eng. Ahmed Ezz. Moreover, several banks and public institutions own stakes in the Company and are represented in EZDK’s Board of Directors.

Table 30: EZDK ManagementEng. Ahmed Ezz Chairman and managing director

Alaa Abu El-Kheir Co-managing director

Farouk Ibrahim Production manager

Samir Naaman Sales manager

Mustafa K. Brekae Financial managerSource: EZDK 2008 Report



Capital and Shareholders’ structure

Al Ezz Dekheila Steel Company is a subsidiary of Al Ezz Steel Rebars, through a stake of 53.2%, while the public sector owns 31.7%. It is worthy to mention that 9.3% of the Company’s shares are free floated.

Al Ezz Dekheila Steel Company has an authorized capital of LE1.5bn. Its issued and paid-in capital amounts to LE1.3bn, distributed over 13.4mn shares, at a par value of LE100/share.

Chart 84: Shareholders’ Structure (as of March 2009)

Source: EGID

Latest Developments

In July 2009, EZDK announced that it will subscribe in the capital increase of its sister company EFS, by injecting US$330mn in EFS’s capital to reach US$600mn, from its current level at US$270mn. Of the US$330mn, EZDK has already paid US$110mn as a first tranche in the capital increase on the 9th of July. Ezz Steel, the Group, came up with the capital increase decision to finance EFS’s capacity expansion plans. Such move will have the effect of diluting the Group’s stake in EFS and bringing the Company under the umbrella of EZDK’s portfolio of investments, which will necessitate consolidating the results of EFS with those of EZDK in the future.

Operations Summary

Operations at EZDK began in 1986 and since then have progressed in terms of efficiency, quality and technology. In 1986, the plant had a nominal capacity of 0.7mn tons, which gradually increased to 1.8mn tons in 1998 and reached 2.7mn tons in 2000. Moreover, since the establishment of EZDK in 1986, several technological changes have been introduced to the Company’s plant to ensure that the end products can compete with the best in the world.

Originally, EZDK produced only long steel products such as reinforcement bars (rebars) used in construction and building activities. However, after the Company’s acquisition by Ezz Steel, EZDK began producing flat products in 2000, specifically Hot Rolled Coils. Moreover, EZDK produces the HRC using both the Compact Strip Production (CRS) and the flexible Thin Slab Casting and Rolling (fTSCR), which are among the most sophisticated and advanced methods in the world.

At EZDK, the main production method used is the DRI method, which utilizes the abundance of natural gas present from off shore fields in Abu-Quir, Alexandria. First, iron ore pellets, which contain about 67% of iron, are imported. These types of ores are among the purest and

Public Sector31.7%

ESR53.2%

Private Sector (excl. ESR)

5.8%

9.3%0.0%

Physical SharesFree Float



richest in the world. Then, the ores are transferred via conveyor belts to the DRI plant, where natural gas is heated and is then passed over, leaving only iron. The iron produced is the purest form of iron and is commonly known as “sponge iron”. Afterwards, the directly reduced iron is transferred to the EAF, the Ladle Furnace and is then transferred to the continuous caster, where it is either cast into billets or passed on to the rolling mill to produce HRC. The process described above is obviously a very simplified version of the actual production process, but describes the basic sequence of events in the production process.

Figure 04: Long and flat products production process sequence at EZDK

Source: Ezz Steel Products Brochure and Global Research

Production Development

The total production of EZDK had a modest decline of 1% in 2008, as it reached 2.51mn tons, as opposed to 2.53mn tons a year earlier. This was primarily a consequence of the 10% reduction in flat steel production, due to the impoverished international demand over flat steel products worldwide on the back of the financial crisis, as it declined from 775 thousand tons in 2007 to 695 thousand tons in 2008. As for long products, output rose by 3% Y-o-Y, as it moved up from1,759 thousand tons to 1,812 thousand tons.

Chart 85: Production Development


In the mean time, total production of EZDK amounted to 677 thousand tons in Q1 2009, declining by 2.7% compared to Q1 2008. This came as a result of the 11.2% Y-o-Y drop in the production of flat steel, which declined from 233 thousand tons to 207 thousand tons.

Iron Ore Pellets

Reinforcing bars - 1.7mn tons(End Product)

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On the other hand, production of rebars rose by 1.6% Y-o-Y in the first quarter of 2009, reaching 470 thousand tons, as opposed to 462 thousand tons produced in the same period of 2008.

Sales Development

The dynamics of both the domestic and global markets affected the Company’s sales in 2008, where the volumes sold tumbled by 4.6% Y-o-Y. This came on the back of the lower exported quantities, which fell by 44.9% over the year, from 544 thousand tons to 300 thousand tons. As demand for long steel products dipped steeply all over the world in the second half of 2008, the Company exported only 18 thousand tons, down from 182 tons exported the previous year, a 90.1% Y-o-Y slump. As for flat exports, they also fell but with a lower rate, as they decreased by 80 thousand tons, reaching 282 thousand tons in 2008, and representing a decline of 22.1%.

Chart 86: Export Sales Development - 2007 to 2008 Chart 87: Local Sales Development - 2007 to 2008


On the other hand, local sales volumes soared by 6.1% over the year, as the Company was able to sell 2.17mn tons in the local market, up from 2.05mn tons a year before. This rise resulted from the 7.7% incline in domestically sold rebars, which amounted to 1.8mn tons, in response to the thriving construction sector in Egypt. Whereas flat products sold in the local market were diminished by 0.5%, and reached 406 thousand tons.

As for the first quarter of 2009, the Company’s total sales volumes fell by 2.7% Y-o-Y, reaching 692 thousand tons, down from 711 thousand tons sold in the same period of the previous year. This was attributed to the 9.6% decrease in exports, from 125 thousand tons to 113 thousand tons, which was in turn a result of a 72.2% drop in exported rebars. On the other hand, the Company’s exported quantities of flat steel in Q1 2009 were almost the same as those exported in Q1 2008.

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Chart 88: Export Sales Development(Q1 2008 & Q1 2009)

Chart 89: Local Sales Development(Q1 2008 & Q1 2009)


The local sales volumes declined by 1.2% from 586 thousand tons in Q1 2008 to 579 thousand tons in Q1 2009. This was attributed to a 32.4% slump in the sold quantities of flat steel. On the contrary, long products sold in the local market inclined by 8.8% Y-o-Y, reaching 483 thousand tons.

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Financial performance 2008 & Q1 2009

Income statement

Although 2008 was hit by the world financial crisis, it is deemed to be a remarkable year for EZDK, as the Company was able to realize a 31.9% Y-o-Y incline in Sales, to reach LE11.6bn, compared to LE8.8bn in 2007. This was attributed to the higher Y-o-Y Sales realized in all of 2008 quarters. Q1 2008 witnessed a 30.3% Y-o-Y and a 25.4% Q-o-Q increase in Sales value. The second quarter Sales grew by 41.5% Y-o-Y and 12.5% Q-o-Q. Whereas the third quarter Sales rose by 38.2% compared to the same period of the previous year, yet it witnessed a slight Q-o-Q decline of 1.6%. As for the last three months of 2008, despite that the Sales were affected by the financial crisis and declined by 9.7% compared to the previous quarter, it soared by 25.3% compared to the same period of 2007.

Chart 90: Quarterly Sales Value

Source: EZDK Financials

As for Q1 2009, the Sales noticeably decreased, as a result of the world recession, as they reached LE2.2bn, which implies a decline of 20% compared to both the first and last quarter of 2008. It is worth mentioning that the Sales value was similar to the last quarter of 2007, which represented a normal year, as 2008 will always be an exceptional year, due to the unprecedented demand for steel worldwide, which ruled before the financial crisis.

The increase in the Company’s Sales value in 2008 was mainly caused by the surge of steel prices over the year. It is worthy to mention that the average selling price of long products soared from LE3,216 in the last quarter of 2007 to LE4,930 in the third quarter of 2008, implying a 53.3%. It then declined to 4,651 in the last quarter of 2008. Furthermore, rebars prices plummeted by around 31% in Q1 2009 compared to Q4 2008, and 19.3% compared to Q1 2008, explaining the drop in the Sales value of the first quarter of 2009. It is worth mentioning that prices of Q1 2009 are very close to those of the last quarter of 2007, which was considered a normal phase, taking into consideration that 2008 prices were exceptional.

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Chart 91: Average Selling Price (long and flat products)

Source: EZDK Financials and Global Research

The same applies for flat steel prices, which soared by 30.3% in Q4 2008, compared to Q4 2007, reaching LE4,575. As for Q1 2009, average flat steel selling prices reached LE3,050, representing a decline of 33.3% Q-o-Q and 20.7% Y-o-Y.

On the other hand, the Company’s total sales dropped by 4.7% Y-o-Y in terms of volumes, as they reached 2.47mn tons in 2008, compared to 2.59mn tons sold in 2007. Also, Q1 2009 total sold volumes shrank by 2.7% Y-o-Y but surged by 9.6% compared to the last quarter of 2008.

The plunge in the Company’s exports was behind the fall of sales in terms of volume. On a cumulative basis, exports of long products witnessed Y-o-Y declines all over 2008 quarters, as Q1 and Q2 dropped by 79.5% and 85.2%, respectively, while the last two quarters fell by 82.8% and 90.2%, respectively. In the mean time, Q1 2009 exports plunged further by 73.6%, affected by the waning demand abroad.

Chart 92: Cumulative Exported Volumes (long and flat products)


The case was a bit different for the flat steel products exports, which grew by 48.8% and 0.9% Y-o-Y in the first and second quarters of 2008, then witnessed a decline of 27.1% and 22.1% in the last two quarters of the year. It is worth mentioning that exported flat steel products inclined by 1.0% in Q1 2009, compared to the same period of 2008.

As for locally sold volumes sold, the first two quarters witnessed a rise in local volumes of both flat and long steel products, compared to the same periods of 2007. Whereas Q3 2008 sales were affected by the international crisis, as long products sold locally were reduced by 2.9% Y-o-Y and 4.5% Q-o-Q. While local sales of flat products declined by 30.1% compared

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to the same quarter of 2007 and 45.6% compared to Q2 2008. Nevertheless, the high demand for steel in Egypt increased local sales, especially long products sales, which rose in Q4 2008 by 17.2% Y-o-Y, and also by 18.3% compared to the previous quarter. As for flat steel, local sales grew by 3.9% compared to Q3 2008, but declined by 31.9% Y-o-Y.

Chart 93: Quarterly Local Sales Volume


In the first three months of 2009, local sales of long products grew by 8.9% compared to Q1 2008, as a result of the robust demand for steel in the local market, despite the world financial crisis. It is worthy to note that on a Q-o-Q basis, local sales dropped slightly by 0.3%. As for flat steel, volumes sold locally surged by 36.2% on a Q-o-Q basis but were decreased by 32.5% on a Y-o-Y basis.

The significant rise in steel demand all over the world caused input costs to rise drastically between 2007 and 2008. Also, the higher energy prices, which were set by the Egyptian government on the energy-intensive industries, contributed to the increase in the Company’s COGS, which rose from LE5.3bn in 2007 to LE7.1bn in 2008, reflecting a 34.6% increase. Consequently the COGS/Sales ratio rose from 59.9% to 61.1%. It is worthy to note that the energy costs, contributing to 10%-12% of the Company’s COGS, were highly affected in 2008, as natural gas price surged by 68% per MBTU, and the price of electricity of kilowatt per hour (kWh) rose by 53%. Moreover, SG&A reached LE233.1mn in 2008, representing a 15.1% Y-o-Y incline, whereas SG&A/Sales witnessed a minimal decline from 2.3% in 2007 to 2.0% in 2008. The higher costs incurred over the year were consequently reflected on a lower EBITDA margin, reaching 36.9%, down from 37.8% a year before.

Chart 94: EZDK Operating Revenues and Expenses (2007-2008)


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The higher input costs resulted in a 16.3% Y-o-Y incline in the Company’s COGS in Q1 2009, bringing the COGS/Sales ratio up to 82.5% in Q1 2009, compared to 56.6% in Q1 2008.This unprecedented growth in COGS/Sales ratio was mainly attributed to a decision taken by the management to use all the high cost inventory, which was acquired during 2008. The decision was taken in order to get rid of this inventory to stop future losses, capitalizing on strong demand for long products in the local market.

Chart 95: EZDK Operating Revenues and Expenses (Q1 2008 & Q1 2009)


On the other hand, SG&A declined by 34.0% Y-o-Y in Q1 2009, which resulted in a decline of the SG&A/Sales ratio to 1.9% from 2.3% in Q1 2008. Nevertheless, due to the huge jump in the Company’s COGS, the EBITDA margin shrank to 15.6% in the first quarter of 2009, down from 41.1% in the same period of the last year.

The Company’s bottom line reached LE3.0bn in 2008, representing an impressive 29.2% rise over 2007. It is worth mentioning that there were extraordinary items, represented by compensation for losses incurred due to the electricity transformer accident in the flat facility in 2007, capital gains and reimbursement of loans extended to the employees union in 2008. Net profit after excluding these items witnessed a surge of 30.8% over the year. This was primarily due to the acceleration of Sales, the 55.7% increase in interest income and the 30.9% drop in interest expense.

It is worthy to note that the Company’s non-operating expenses surged from LE6.0mn in 2007 to LE161.5mn in 2008, mainly affected by foreign exchange losses. In addition, non-operating income, partially affected by foreign exchange gains, reached LE73.1mn, a 65.0% Y-o-Y decline.

Chart 96: EZDK Profitability


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Q1 2009 profit slumped by 76.3% Y-o-Y, on the back of the decline in Sales, along with the surge in COGS. In addition, interest expense inclined by 22.3% Y-o-Y from LE89.3mn to LE109.2mn.

The Company’s income tax rose by 39.8% Y-o-Y in 2008, while the deferred tax declined by 66.1% compared to 2007. In Q1 2009, income and deferred taxes declined by 82.2% and 18.1%, respectively.

Table 31: EZDK 2008 Q-o-Q Income StatementIncome Statement 2008 2008 2008 2008 2009

In LE000s Q1 Q2 Q3 Q4 Q1

Net Sales 2,802,926.8 3,165,696.6 3,022,118.0 2,648,264.3 2,234,577.4

Other Operating Revenues - - - - -

Revenues from Operation 2,802,926.8 3,165,696.6 3,022,118.0 2,648,264.3 2,234,577.4

growth 12.9% -4.5% -12.4% -15.6%

COGS 1,585,061.8 1,844,436.2 1,620,921.9 2,064,021.4 1,844,047.6

growth 16.4% -12.1% 27.3% -10.7%

COGS/Sales 56.6% 58.3% 53.6% 77.9% 82.5%

SG&A 64,776.2 53,429.5 65,489.6 49,454.0 42,754.5

growth -17.5% 22.6% -24.5% -13.5%

SG&A/Sales 2.3% 1.7% 2.2% 1.9% 1.9%

EBITDA 1,153,088.8 1,267,830.9 1,335,706.4 534,788.9 347,775.2

EBITDA Margin 41.1% 40.0% 44.2% 20.2% 15.6%

Depreciation 106,598.0 106,593.5 106,593.8 107,369.5 87,251.2

Operating Profit -EBIT 1,046,490.8 1,161,237.4 1,229,112.7 427,419.4 260,524.1

EBIT Margin 37.3% 36.7% 40.7% 16.1% 11.7%

Interest Income 17,882.8 20,382.5 27,844.6 32,302.7 61,544.3

Investment Income - - - - 18,813.3

Interest Expense 89,287.4 2,645.1 40,682.6 70,716.7 109,179.1

Other Provisions - 52,220.5 (23,136.7) (29,083.8) -

Other Non-Operating Income 3,873.1 100,484.3 (3,328.6) (27,952.4) 2,291.5

Other Non-Operating Expenses 3,223.3 40,415.7 25,479.2 92,411.6 7,006.4

Net Profit Before Tax 975,736.0 1,186,822.9 1,210,603.6 297,725.1 226,987.6

Income Tax 184,398.6 235,578.1 210,829.9 56,463.5 32,843.1

Deferred Tax 10,774.8 1,812.0 25,705.4 10,439.9 8,819.6

Net Profit After Tax 780,562.6 949,432.9 974,068.3 230,821.7 185,324.9

ROS 27.8% 30.0% 32.2% 8.7% 8.3%

Capital Gain/Loss - - - 30,890.1 -

Net Profit After Unusual Items 780,562.6 949,432.9 974,068.3 261,711.8 185,324.9Source: EZDK Financials

Balance Sheet

Assets

In 2008, the Company’s total assets rose by 12.4% to reach LE10.3bn. The main contributors to this increase were the current assets, mainly the excess cash and the inventory, which rose by 356.7% and 36.3%, respectively. On the other hand, net fixed assets, which share reached 52.1%, decreased by 5.4% Y-o-Y. It is worthy to note that the current assets constituted 45.9% of the Company’s total assets.



Chart 97: Assets Contribution to 2008 Balance Sheet


As aforementioned, 2008 Sales grew by 31.9% Y-o-Y, exceeding the growth realized in the Company’s total assets, which led to a lower asset turnover of 0.88, compared to 1.03 in 2007.

Liabilities and Equity

Total liabilities in 2008 reached LE7.1bn compared to LE5.9bn in 2007, reflecting a 21.2% rise. This rise was mainly driven by a massive increase in the Company’s overdraft, which witnessed a noticeable rise from LE1.4bn in 2007 to LE1.9bn in 2008, a 39.4% incline. It is worth mentioning that current liabilities accounted for 48.5% of the 2008 balance sheet.

On the other hand, EZDK has been successfully decreasing its long term debt, as it declined at a CAGR of 82.0% over the last 3 years. Long-term debt amounted to LE1.4bn in 2008, down from LE2.5bn in 2005.

Chart 98: Liabilities and Equity Contribution to 2008 Balance Sheet


In 2008, the total debt rose by 8.9%, while the equity, making up for 30.7% of the balance sheet, declined by 3.5% Y-o-Y, bringing the Company’s Debt/Equity ratio to 128.1%, compared to 113.4% in the previous year. The increase in total debt came on the back of the 39.4% surge in short term debt along with a 76.9% jump in CPLTD. It is worth mentioning that Debt/Equity ratio reached 115.5% in Q1 2009, as total debt declined by 18.8% compared to 2008, while the equity declined by 10%.

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Main Forecast Assumptions

ProductionGiven the robust growth witnessed in the construction sector in Egypt, and consequently its effect on demand for long products, EZDK is expected to maintain the same historical production levels of rebars over the forecasted period, which starts from 2009 and ends in 2013. In 2008, the utilization rate was around 106.6%. In the first year of the projection period, the utilization rate is expected to witness a slight increase to reach around 108.1%, in response to the continuous demand for long products in the local market. For the rest of the forecasted period, production is to be kept at almost the same utilization rate of 2008.

As for flat steel, the world recession that started in 2008 and its consequent effect on the deterioration of demand for flat steel worldwide affected the operating rates at EZDK, which fell to 69.5% in 2008 down from 75.5% in the previous year. We expect these rates to rise gradually over the projection period, as the international economies stabilize until reaching more than 80% by 2013.

SalesVolumes of rebars to be sold in 2009 are expected to exceed those of 2008, mainly triggered by the strong domestic demand, as almost all quantities are expected to be sold in the local market. Sales are expected to remain close to 2008 levels, as they are expected to reach around 1.8mn tons by 2013. We expect a minimal rise in the exports to total sales ratio to reach around 1% in 2010, as demand from international markets starts to rebound. Starting from 2011, we assumed a stable rate of 95% of rebars sales to be directed to the local market.

As for flat steel, sales volumes are to increase by 5% Y-o-Y in 2009. This assumption was based on the fact that in Q1 2009 the Company was able to export the same quantities of flat steel exported in Q1 2008. Therefore, we assumed an exports to sales ratio of around 44% over the year, taking into consideration the slowdown in demand in the international markets, which is expected to persist until 2010. Thus, total sales are forecasted to slow down by around 2% in the second year of the projection period, and then to rise notably by around 9% in 2011 with expectations of a pickup in demand. Thereafter, sales are expected to rise at 3% annually. The ratio of exports to sales is forecasted to range between 46% and 47% starting from 2011 until the end of the forecasted period.

Chart 99: EZDK Forecasted Sales Volumes


Prices

The prices of both types of steel are expected to move in the same direction, as they are to witness a slight increase yearly until they reach back 2007 levels by the end of the projection period. It

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Chart 100: EZDK Forecasted Selling Prices vs. Historical Average Prices


Sales Value

The forecasted assumptions of sales volumes and prices led to an expected decline of around 31% in the sales of both long and flat steel in 2009, due to the decline in finished steel prices. However, rebars sales are expected to rise starting from 2011 at modest growth rates to reach around LE6.2bn by 2013, whereas flat steel sales are expected to jump by around 16% in 2011, with the expectations for rising selling prices, as well as sales volumes. Sales are expected to continue growing at decelerating rates in 2012 and 2013 to reach around LE2.9bn by the end of the projection period. It is worth mentioning that 2008 was considered an abnormal year for the steel sector and the year’s Sales are not expected to be realized again over the projection period.

Costs

As aforementioned, the COGS/Sales ratio reached high levels in the first quarter of 2009, reaching 82.5% compared to 61.1% realized over 2008. This came on the back of the management’s decision to get rid of high cost inventory acquired when steel prices reached high levels before the occurrence of the financial crisis. To be conservative, we assumed a COGS/Sales ratio of around 73% in 2009, which is expected to stabilize afterwards at 61% approximately. As for SG&A, they were kept close to 2% of Sales over the projection period.

Chart 101: EZDK Projected Sales & COGS/Sales Ratio


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Other Income Statement Assumptions

Interest Expense

The Company’s interest bearing debt includes short term and long term debt, as well as financial lease. After conducting the debt run off, the average interest rate is expected to rise to around 9% of the total interest bearing debt in 2009, compared to a rate of 5.3% in 2008. This higher rate resulted from a new LE2.5bn debt, which was extended to the Company at the beginning of 2009. The new loan is to be repaid over 7 years, with a grace period of 2 years, at an interest rate of 11.5%. This resulted in the higher weighted interest rate. As the old long term loans of the Company are expected to be settled in 2010, the interest rate of EZDK debt is expected to rise further to 11% starting from 2011, reflecting the expense of the latest acquired loan.

Investment Income

We assumed a constant investment income over the projection period matching Q1 2009 results, which represents 38% return on EZDK’s investments, mainly in “Contra Steel Company”.

Other Non-Operating Income and Expenses

We forecasted non-operating income at a stable rate of 0.1% of Sales over the forecasted period, which was the same rate realized in Q1 2009. We also took the same ratio of non-operating expenses to COGS of Q1 2009, which reached 0.4%, to forecast the expenses over the forecasted period.

Profitability Ratios

The Company’s operating margins are expected to decline in 2009, as a result of the lower forecasted revenues accompanied by higher costs compared to 2008. Nevertheless, these ratios are to improve starting from 2010 to levels close to 2008. The same applies for the return on sales margin, which is forecasted to fall in 2009 and then to incline slightly until reaching around 24% by 2013.

Chart 102: EZDK Forecasted Profitability Ratios


0%

5%

10%

15%

20%

25%

30%

35%

40%

2008 2009 F 2010 F 2011 F 2012 F 2013 F

EBITA Margin EBIT Margin ROS



Valuation and Recommendation

Three valuation methodologies were conducted for Al Ezz Dekheila Steel Company – Alexandria (EZDK), the Discounted Cash Flow (DCF) valuation, the Dividend Discount Model (DDM), together with the EV/EBITDA relative valuation technique to reach a fair value for the stock. We assigned 60% weight to the DCF valuation, 20% to the DDM valuation and 20% to the EV/EBITDA multiplier.

Discounted Cash Flow

We have conducted a DCF valuation for Al Ezz Dekheila Steel Company – Alexandria (EZDK). The DCF model is based on a 5-year (FY2009-FY2013) explicit forecast period for the Free Cash Flow to Firm (FCFF), to reflect the Company’s expansion plan effect. The terminal value is estimated using the constant growth Gordon Growth Model (GGM). The forecasted cash flow and the terminal value is then discounted at the Company Weighted Average Cost of Capital (WACC). In our DCF valuation, we have used the following assumptions:


Market Risk 19.79%

Beta 1



Under these assumptions, the cost of equity using the Capital Asset Pricing Model (CAPM) reached 19.79% and a WACC of 16.63%, resulting in a per share value of LE1368.4, with an upside potential of 84.9% over the current market price (as of July 26th, 2009) at LE740.0.


FCFF 2,169,548 2,459,572 3,108,548 3,243,156 3,336,048

Discounted Cash Flow 2,029,747 1,972,906 2,137,856 1,911,525 23,839,375

Discounted TV 12,047,062

NPV 20,099,095

+ Cash* 1,458,108

- debt* (3,268,697)

Equity Value 18,288,507

# of Shares 13,364

Share Value 1,368.4 * Debt and Cash are as of the 2009 Q1 results.


Sensitivity Analysis

A sensitivity analysis is provided given different growth rate assumption and WACC. The shaded area represents the most probable outcomes.



Table 33: DCF Sensitivity AnalysisTerminal Growth

0.3% 1.3% 2.3% 3.3% 4.3%

WACC

14.63% 1,441.8 1,523.7 1,618.8 1,730.8 1,864.5 15.63% 1,335.4 1,404.5 1,483.9 1,576.3 1,685.0 16.63% 1,242.5 1,301.4 1,368.4 1,445.6 1,535.3 17.63% 1,160.8 1,211.4 1,268.5 1,333.7 1,408.6 18.63% 1,088.4 1,132.1 1,181.2 1,236.8 1,300.0


Dividend Discount ModelSince EZDK is one of the few companies on the Egyptian exchange that have a stable dividend policy and have quarterly dividend distribution, we thought a Dividend Discount Model (DDM) was another valuation method that will help in reaching the stock’s fair value.

At a cost of equity of 19.79% and a terminal growth of 4.3%, a DDM was conducted and resulted in a per share value of LE1,217.5, with an upside potential of 64.5% over the current market price (as of July 26th, 2009) at LE740.0.

Table 34: DDM Calculation(LE 000s) 2009 2010 2011 2012 2013Dividend 1,018,466 1,647,370 1,848,235 2,023,157 2,109,725

Cost of Equity 19.8% 19.8% 19.8% 19.8% 19.8%Perpetual Growth 4.3%NPV 941,890 1,271,815 1,191,159 1,087,944 14,183,360NPV of Dividend 4,492,808NPV of TV 11,777,878Enterprise Value 16,270,687Number of Shares 13,364Fair Value 1,217.5


Relative ValuationFor the relative valuation, we compared EZDK with selected international iron and steel players in terms of 2008 Enterprise Value/Earnings Before Interests, Taxes, Depreciation and Amortization (EV/EBITDA) resulting in an average for the comparable companies of 4.89x, as opposed to 2.73x for EZDK. The outcome was a share value of LE726.5 based on EZDK 2009 estimated EBITDA.

Table 35: Relative ValuationCompanies EV/EBITDA*Arcelor Mittal (MT) 5.49United States Steel Corp. (X) 2.5AK Steel Holding Corp. (AKS) 6.34Nucor Corporation (NUE) 5.31Commercial Metals Co. (CMC) 7.42POSCO (PKX) 4.53Companhia Siderurgica Nacional (SID) 6.58Friedman Industries Inc. (FRD) 0.95Average 4.89Al Ezz Dekheila Steel Company – Alexandria (EZDK) 2.73

* Based on Prices as of July 24th, 2009 for the comparable companies and the 26th of July 2009 for Al Ezz Dekheila

Steel Company – Alexandria (EZDK).Source: Companies Financials and Global Research



A 20% weight was given for the multiple valuation, as the price based multiples are affected by various factors, among these are poles apart market conditions, stock markets dissimilar levels of maturity, which could manipulate the Companies fair value.

Table 36: Weighted Price

Valuation Approach

Fair Value/

Share (LE) Weight

Weighted

Value (LE)

DCF Valuation 1,368.4 60% 821.1

DDM Valuation 1,217.5 20% 243.5

Peer Group Valuation 726.5 20% 145.3

Estimated Fair Price 1,209.9

Current Market Price (LE)* 740.0

Upside/(Downside) potential 63.5%* Market price as of July 26th, 2009.Source: Global Research

Combining the three methods resulted in a fair value of LE1,209.9 per share, compared to the current market price (as of July 26th, 2009) at LE740.0 per share, implying an upside potential of 63.5%. Consequently, we initiate our coverage for Al Ezz Dekheila Steel Company – Alexandria (EZDK) with a “BUY” recommendation.


July 2009 Egypt Steel Sector �0�

Tab

le 3

7: B

alan

ce S

heet

Al E

zz D

ekhe

ila S

teel

Com

pany

– A

lexa

ndri

a (E

ZD

K)

In L

E 0

00s

2005

2006

2007

2008

2009

(F

)20

10 (

F)

2011

(F

)20

12 (

F)

2013

(F

)A

sset

sO

pera

ting

Cas

h30

1,43

2.8

113,

516.

01,

268,

002.

866

7,96

7.4

462,

096.

546

3,58

3.8

500,

136.

551

9,88

0.8

531,

276.

1E

xces

s C

ash

729,

922.

640

9,29

1.7

406,

573.

61,

856,

719.

51,

143,

588.

41,

808,

172.

61,

434,

354.

474

7,70

7.4

671,

199.

1M

arke

tabl

e Se

curi

ties

Net

Acc

ount

s R

ecei

vabl

es19

5,52

3.0

257,

111.

285

,610

.846

,038

.276

,411

.476

,657

.382

,701

.685

,966

.587

,850

.8In

vent

ory

1,48

1,06

1.6

1,36

7,27

2.3

1,39

0,86

1.5

1,89

5,46

4.5

1,56

4,30

2.7

1,32

4,40

1.0

1,42

6,51

5.8

1,47

6,19

5.7

1,50

7,06

0.5

Due

s Fr

om H

C’s

& A

ffili

ates

8,43

7.9

1,74

8.5

275.

215

4.4

127.

410

7.9

116.

212

0.3

122.

8O

ther

Cur

rent

Ass

ets

342,

473.

230

5,34

4.4

240,

911.

123

7,20

3.7

234,

858.

319

8,84

0.4

214,

171.

522

1,63

0.3

226,

264.

2T

otal

Cur

rent

Ass

ets

3,05

8,85

1.1

2,45

4,28

4.2

3,39

2,23

5.0

4,70

3,54

7.6

3,48

1,38

4.8

3,87

1,76

3.1

3,65

7,99

6.0

3,05

1,50

1.0

3,02

3,77

3.4

Lon

g T

erm

Len

ding

8,93

1.9

8,14

1.6

6,02

1.6

3,42

6.9

3,42

6.9

3,42

6.9

3,42

6.9

3,42

6.9

3,42

6.9

Subs

idia

ries

& O

ther

Lon

g T

erm

Inv

estm

ents

6,25

9.9

6,25

9.9

62,8

93.6

48,9

33.4

48,9

33.4

48,9

33.4

48,9

33.4

48,9

33.4

48,9

33.4

Proj

ects

Und

er I

mpl

emen

tatio

n18

,498

.413

,484

.715

,297

.815

1,63

4.4

76,6

34.4

11,6

34.4

7,63

4.4

4,63

4.4

2,63

4.4

Gro

ss F

ixed

Ass

ets

:10

,038

,468

.210

,045

,883

.610

,075

,971

.610

,193

,454

.910

,308

,454

.910

,393

,454

.910

,417

,454

.910

,440

,454

.910

,462

,454

.9L

ess

: Acc

. Dep

reci

atio

n3,

605,

522.

34,

002,

063.

54,

427,

742.

24,

847,

677.

05,

272,

676.

65,

716,

907.

66,

158,

289.

56,

590,

261.

17,

012,

735.

0N

et F

ixed

Ass

ets

6,43

2,94

5.9

6,04

3,82

0.0

5,64

8,22

9.4

5,34

5,77

7.9

5,03

5,77

8.3

4,67

6,54

7.2

4,25

9,16

5.4

3,85

0,19

3.8

3,44

9,71

9.8

Goo

dwill

Tot

al A

sset

s9,

525,

487.

28,

525,

990.

49,

124,

677.

610

,253

,320

.38,

646,

157.

88,

612,

305.

07,

977,

156.

16,

958,

689.

56,

528,

488.

0L

iabi

litie

s &

Sha

reho

lder

’s E

quit

ySh

ort T

erm

Deb

t83

6,37

2.6

661,

971.

11,

353,

023.

61,

886,

519.

938

1,60

2.0

781,

090.

054

6,66

0.7

86,9

45.0

88,7

43.6

CPL

TD

611,

239.

749

4,88

7.0

376,

204.

466

5,38

0.7

532,

226.

353

2,22

6.3

659,

822.

850

0,54

8.2

500,

548.

2A

ccou

nts

Paya

ble

602,

620.

816

2,46

5.2

213,

365.

334

8,70

3.9

293,

572.

924

8,55

0.5

267,

714.

427

7,03

7.8

282,

830.

2A

ccru

ed E

xpen

ses

210,

447.

918

4,44

6.3

133,

636.

113

2,27

1.5

146,

786.

412

4,27

5.3

133,

857.

213

8,51

8.9

141,

415.

1D

own

Paym

ent

85,5

00.2

141,

028.

721

3,99

2.0

356,

102.

124

6,34

9.7

247,

142.

626

6,62

9.3

277,

155.

228

3,23

0.2

Tax

es P

ayab

le12

8,66

0.0

490,

367.

649

1,65

7.0

687,

270.

127

1,03

3.4

438,

489.

449

1,86

9.3

538,

477.

356

1,52

7.4

Due

s T

o A

ffili

ates

--

5,41

5.4

1,40

9.4

1,16

3.2

984.

81,

060.

71,

097.

71,

120.

6D

ivid

ends

Pay

able

4,76

5.7

11,9

40.5

478,

765.

888

6,49

5.7

--

--

-O

ther

Cur

rent

Lia

bilit

ies

42,5

00.2

12,4

50.3

22,4

81.8

8,32

0.3

6,86

6.6

5,81

3.6

6,26

1.8

6,47

9.9

6,61

5.4

Tot

al C

urre

nt L

iabi

litie

s2,

522,

107.

12,

159,

556.

73,

288,

541.

34,

972,

473.

71,

879,

600.

62,

378,

572.

42,

373,

876.

11,

826,

260.

11,

866,

030.

8T

otal

Lon

g T

erm

Deb

t2,

490,

416.

42,

346,

543.

41,

869,

312.

21,

405,

621.

53,

396,

645.

32,

887,

669.

12,

251,

096.

51,

750,

548.

21,

250,

000.

0Fi

nanc

ial L

ease

249,

027.

714

2,16

6.6

100,

097.

069

,750

.446

,500

.223

,250

.1-

--

Bon

dsPr

ovis

ions

For

Def

erre

d T

axes

186,

900.

431

6,27

1.4

459,

966.

350

8,69

8.5

527,

916.

655

9,00

8.5

593,

885.

363

2,06

7.0

671,

883.

2O

ther

Pro

visi

ons

244,

833.

020

8,29

4.3

51,8

85.8

48,4

07.7

48,4

07.7

48,4

07.7

48,4

07.7

48,4

07.7

48,4

07.7

Oth

er N

on-C

urre

nt L

iabi

litie

s46

0,46

6.3

147,

775.

394

,622

.310

3,61

3.7

117,

429.

299

,420

.210

7,08

5.8

110,

815.

111

3,13

2.1

Tot

al L

iabi

litie

s6,

153,

750.

85,

320,

607.

75,

864,

424.

97,

108,

565.

46,

016,

499.

65,

996,

328.

15,

374,

351.

44,

368,

098.

33,

949,

453.

7N

et P

aid-

In C

apita

l1,

366,

776.

71,

366,

776.

71,

047,

499.

31,

336,

441.

31,

336,

441.

31,

336,

441.

31,

336,

441.

31,

336,

441.

31,

336,

441.

3L

egal

& S

tatu

tory

Res

erve

s36

3,30

8.3

363,

308.

336

3,30

8.3

363,

308.

336

3,30

8.3

363,

308.

336

3,30

8.3

363,

308.

336

3,30

8.3

Gen

eral

& O

ther

Res

erve

s31

6,92

2.8

550,

349.

570

0,34

9.5

561,

407.

556

1,40

7.5

561,

407.

556

1,40

7.5

561,

407.

556

1,40

7.5

Ret

aine

d E

arni

ngs

99,6

54.8

190,

186.

027

7,98

3.8

366,

676.

036

8,50

1.2

354,

819.

934

1,64

7.6

329,

434.

131

7,87

7.2

Net

Pro

fit/L

oss

of th

e ye

ar (

less

qua

rter

ly d

ivid

ends

)1,

225,

073.

873

4,76

2.2

871,

111.

751

6,92

1.8

Shar

ehol

ders

’ E

quit

y3,

371,

736.

43,

205,

382.

73,

260,

252.

63,

144,

754.

82,

629,

658.

32,

615,

977.

02,

602,

804.

62,

590,

591.

22,

579,

034.

2T

otal

Lia

bilit

ies

and

Equ

ity

9,52

5,48

7.2

8,52

5,99

0.4

9,12

4,67

7.6

10,2

53,3

20.3

8,64

6,15

7.8

8,61

2,30

5.0

7,97

7,15

6.1

6,95

8,68

9.5

6,52

8,48

8.0

Sour

ce:

Com

pany

Fin

anci

als

and

Glo

bal R

esea

rch



Tab

le 3

8: I

ncom

e St

atem

ent

Al E

zz D

ekhe

ila S

teel

Com

pany

– A

lexa

ndri

a (E

ZD

K)

In L

E 0

00s

2005

2006

2007

2008

2009

(F

)20

10 (

F)

2011

(F

)20

12 (

F)

2013

(F

)R

even

ues

from

Ope

rati

on7,

897,

633.

08,

102,

236.

48,

825,

701.

711

,639

,005

.78,

051,

806.

78,

077,

722.

28,

714,

634.

49,

058,

669.

79,

257,

226.

5C

OG

S4,

833,

360.

84,

624,

682.

05,

284,

112.

67,

114,

441.

45,

871,

457.

94,

971,

010.

35,

354,

287.

95,

540,

756.

75,

656,

604.

8S.

, G

. & A

dm. E

xpen

ses

122,

498.

014

4,06

2.3

202,

617.

623

3,14

9.3

194,

885.

919

7,44

5.3

201,

546.

320

6,34

9.9

212,

356.

5E

BIT

DA

2,94

1,77

4.2

3,33

3,49

2.1

3,33

8,97

1.4

4,29

1,41

5.1

1,98

5,46

2.9

2,90

9,26

6.5

3,15

8,80

0.2

3,31

1,56

3.1

3,38

8,26

5.3

Dep

reci

atio

n44

8,01

8.1

484,

657.

443

1,73

6.8

427,

154.

842

4,99

9.6

444,

231.

144

1,38

1.8

431,

971.

642

2,47

3.9

Ope

rati

ng P

rofi

t -E

BIT

2,49

3,75

6.1

2,84

8,83

4.7

2,90

7,23

4.6

3,86

4,26

0.3

1,56

0,46

3.3

2,46

5,03

5.5

2,71

7,41

8.4

2,87

9,59

1.4

2,96

5,79

1.4

Inte

rest

Inc

ome

74,9

07.4

34,9

05.4

63,2

01.4

98,4

12.7

161,

468.

099

,451

.215

7,24

6.2

124,

737.

465

,023

.7In

vest

men

t Inc

ome

--

--

18,8

13.3

18,8

13.3

18,8

13.3

18,8

13.3

18,8

13.3

Inte

rest

Exp

ense

345,

660.

230

8,64

2.4

294,

422.

220

3,33

1.9

371,

317.

938

0,04

1.0

422,

499.

931

8,75

9.2

229,

753.

3O

ther

Pro

visi

ons

125,

433.

781

,679

.4-

--

--

--

Oth

er N

on-O

pera

ting

Inco

me

593,

471.

012

2,67

6.9

208,

507.

473

,076

.48,

051.

88,

077.

78,

714.

69,

058.

79,

257.

2O

ther

Non

-Ope

ratin

g E

xpen

ses

--

5,95

5.0

161,

529.

922

,311

.518

,889

.820

,346

.321

,054

.921

,495

.1N

et P

rofi

t B

efor

e T

ax2,

691,

040.

52,

616,

095.

22,

878,

566.

23,

670,

887.

71,

355,

166.

92,

192,

446.

92,

459,

346.

32,

692,

386.

72,

807,

637.

2In

com

e T

ax12

8,66

0.0

490,

367.

649

1,65

7.0

687,

270.

127

1,03

3.4

438,

489.

449

1,86

9.3

538,

477.

356

1,52

7.4

Def

erre

d T

ax18

6,90

0.4

129,

371.

014

3,69

5.0

48,7

32.1

19,2

18.1

31,0

91.9

34,8

76.9

38,1

81.7

39,8

16.1

Net

Pro

fit

Aft

er T

ax2,

375,

480.

21,

996,

356.

62,

243,

214.

22,

934,

885.

51,

064,

915.

41,

722,

865.

61,

932,

600.

22,

115,

727.

72,

206,

293.

6C

apita

l Gai

n/L

oss

419.

611

,148

.152

,426

.230

,890

.1N

et P

rofi

t A

fter

Unu

sual

Ite

ms

2,37

5,89

9.7

2,00

7,50

4.7

2,29

5,64

0.4

2,96

5,77

5.6

1,06

4,91

5.4

1,72

2,86

5.6

1,93

2,60

0.2

2,11

5,72

7.7

2,20

6,29

3.6

Sour

ce:

Com

pany

Fin

anci

als

and

Glo

bal R

esea

rch

Tab

le 3

9: A

ppro

pria

tion

Sta

tem

ent

In L

E 0

00s

2005

2006

2007

2008

2009

(F

)20

10 (

F)

2011

(F

)20

12 (

F)

2013

(F

)O

p B

alan

ce o

f R

etai

ned

Ear

ning

s 9

9,65

5 1

90,1

86

277

,984

3

66,6

76

383

,827

3

68,5

01

354

,820

3

41,6

48

329

,434

N

PAT

2,3

75,9

00

2,0

07,5

05

2,2

95,6

40

2,9

65,7

76

1,0

64,9

15

1,7

22,8

66

1,9

32,6

00

2,1

15,7

28

2,2

06,2

94

Leg

al R

eser

veG

ener

al R

eser

ve 2

33,4

27

150

,000

1

50,0

00

-

-

-

-

-

-

Com

mon

Div

iden

d 1

,940

,823

1

,667

,468

1

,939

,790

2

,806

,527

1

,018

,466

1

,647

,370

1

,848

,235

2

,023

,157

2

,109

,725

E

mpl

oyee

s re

mun

erat

ion

82,

007

87,

747

88,

000

100

,000

4

3,47

4 6

2,75

8 6

8,64

1 7

3,74

1 7

6,09

2 B

oard

of

dire

ctor

s 2

9,11

2 2

5,01

2 2

9,15

8 4

2,09

8 1

8,30

2 2

6,42

0 2

8,89

6 3

1,04

3 3

2,03

3 B

alan

ce C

arri

ed F

orw

ard

190

,186

2

67,4

64

366

,676

3

83,8

27

368

,501

3

54,8

20

341

,648

3

29,4

34

317

,877

So

urce

: C

ompa

ny F

inan

cial

s an

d G

loba

l Res

earc

h


July 2009 Egypt Steel Sector �0�

Tab

le 4

0: C

ash

Flo

w S

tate

men

tA

l Ezz

Dek

heila

Ste

el C

ompa

ny –

Ale

xand

ria

(EZ

DK

)In

LE

000

s20

0520

0620

0720

0820

09 (

F)

2010

(F

)20

11 (

F)

2012

(F

)20

13 (

F)

Ope

rati

ngN

et P

rofi

t Aft

er U

nusu

al I

tem

s 2

,375

,899

.7

2,0

07,5

04.7

2

,295

,640

.4

2,9

65,7

75.6

1

,064

,915

.4

1,7

22,8

65.6

1

,932

,600

.2

2,1

15,7

27.7

2

,206

,293

.6

Dep

reci

atio

n 4

48,0

18.1

4

84,6

57.4

4

31,7

36.8

4

27,1

54.8

4

24,9

99.6

4

44,2

31.1

4

41,3

81.8

4

31,9

71.6

4

22,4

73.9

Pr

ovis

ion

125

,433

.7

81,

679.

4 -

-

-

-

-

-

-

Fi

nanc

e co

sts

345

,660

.2

308

,642

.4

294

,422

.2

203

,331

.9

371

,317

.9

380

,041

.0

422

,499

.9

318

,759

.2

229

,753

.3

Inte

rest

inco

me

(74

,907

.4)

(34

,905

.4)

(63

,201

.4)

(98

,412

.7)

(16

1,46

8.0)

(99

,451

.2)

(15

7,24

6.2)

(12

4,73

7.4)

(65

,023

.7)

Cap

ital l

osse

s/(g

ains

) (

419.

6) (

11,1

48.1

) (

52,4

26.2

) (

30,8

90.1

) -

-

-

-

-

In

vest

men

t Inc

ome

-

-

-

-

(18

,813

.3)

(18

,813

.3)

(18

,813

.3)

(18

,813

.3)

(18

,813

.3)

Inco

me

Tax

128

,660

.0

490

,367

.6

491

,657

.0

687

,270

.1

271

,033

.4

438

,489

.4

491

,869

.3

538

,477

.3

561

,527

.4

Def

erre

d T

ax 1

86,9

00.4

1

29,3

71.0

1

43,6

95.0

4

8,73

2.1

19,

218.

1 3

1,09

1.9

34,

876.

9 3

8,18

1.7

39,

816.

1 O

pera

ting

prof

it be

fore

wor

king

cap

ital c

hang

es 3

,535

,245

.2

3,4

56,1

69.0

3

,541

,523

.8

4,2

02,9

61.7

1

,971

,203

.2

2,8

98,4

54.4

3

,147

,168

.5

3,2

99,5

66.9

3

,376

,027

.4

(Inc

reas

e)/d

ecre

ase

in in

vent

ory

(1,

481,

061.

6) 1

13,7

89.3

(

23,5

89.2

) (

504,

603.

0) 3

31,1

61.8

2

39,9

01.7

(

102,

114.

7) (

49,6

79.9

) (

30,8

64.8

)(I

ncre

ase)

/dec

reas

e in

rec

eiva

bles

& o

ther

s (

546,

434.

0) (

17,7

70.2

) 2

37,4

07.0

4

3,40

0.9

(28

,000

.9)

35,

791.

5 (

21,3

83.7

) (

10,7

27.7

) (

6,52

0.7)

(Inc

reas

e)/d

ecre

ase

in p

rovi

sion

incr

ease

/(de

crea

se)

in p

ayab

les

& o

ther

s 9

41,0

69.1

(

569,

338.

7) (

401,

867.

4) (

233,

740.

4) (

839,

338.

5) (

339,

005.

5) (

389,

732.

7) (

467,

103.

1) (

523,

555.

3)C

ash

gene

rate

d fr

om o

pera

tion

s 2

,448

,818

.7

2,9

82,8

49.5

3

,353

,474

.2

3,5

08,0

19.2

1

,435

,025

.6

2,8

35,1

42.1

2

,633

,937

.4

2,7

72,0

56.1

2

,815

,086

.5

Rec

eipt

s fr

om e

xtra

ordi

nary

item

sN

et c

ash

prov

ided

by

oper

atin

g ac

tiviti

es 2

,448

,818

.7

2,9

82,8

49.5

3

,353

,474

.2

3,5

08,0

19.2

1

,435

,025

.6

2,8

35,1

42.1

2

,633

,937

.4

2,7

72,0

56.1

2

,815

,086

.5

Inve

stin

gPu

rcha

se o

f fi

xed

asse

ts (

6,88

0,96

4.0)

(95

,531

.5)

(36

,146

.2)

(12

4,70

3.3)

(11

5,00

0.0)

(85

,000

.0)

(24

,000

.0)

(23

,000

.0)

(22

,000

.0)

Dis

posa

l of

fixe

d as

sets

Con

stru

ctio

n w

orks

in p

rogr

ess

(18

,498

.4)

5,0

13.6

(

1,81

3.1)

(13

6,33

6.5)

75,

000.

0 6

5,00

0.0

4,0

00.0

3

,000

.0

2,0

00.0

G

oodw

illO

ther

long

term

ass

ets

(8,

931.

9) 7

90.4

2

,120

.0

2,5

94.7

-

-

-

-

-

C

hang

e in

inve

stm

ents

(6,

259.

9) -

(

56,6

33.7

) 1

3,96

0.2

18,

813.

3 1

8,81

3.3

18,

813.

3 1

8,81

3.3

18,

813.

3 N

et c

ash

from

inve

stin

g ac

tivi

ties

(6,

914,

654.

1) (

89,7

27.5

) (

92,4

73.1

) (

244,

484.

9) (

21,1

86.7

) (

1,18

6.7)

(1,

186.

7) (

1,18

6.7)

(1,

186.

7)F

inan

cing

Incr

ease

d in

cap

ital

1,3

66,7

76.7

-

(

319,

277.

4) 2

88,9

42.0

-

-

-

-

-

R

ecei

pts

from

lon

g te

rm lo

ans

& li

abili

ties

4,9

53,8

22.3

(

843,

026.

3) (

12,7

97.6

) 3

82,8

80.8

3

62,7

35.0

(

119,

655.

4) (

724,

113.

2) (

1,07

7,62

7.4)

(45

6,61

6.6)

Div

iden

ds p

aid

(37

0,94

0.1)

(2,

173,

858.

3) (

1,92

1,49

3.1)

(3,

370,

215.

4) (

1,58

0,01

2.0)

(1,

736,

546.

9) (

1,94

5,77

2.5)

(2,

127,

941.

1) (

2,21

7,85

0.6)

Incr

ease

/(de

crea

se)

in d

ivid

ends

pay

able

4,7

65.7

7

,174

.9

466

,825

.2

407

,730

.0

(88

6,49

5.7)

-

-

-

-

Cap

ital g

ains

/loss

es 4

19.6

1

1,14

8.1

52,

426.

2 3

0,89

0.1

-

-

-

-

-

Inte

rest

inco

me

74,

907.

4 3

4,90

5.4

63,

201.

4 9

8,41

2.7

161

,468

.0

99,

451.

2 1

57,2

46.2

1

24,7

37.4

6

5,02

3.7

Def

erre

d T

ax (

186,

900.

4) (

129,

371.

0) (

143,

695.

0) (

48,7

32.1

) (

19,2

18.1

) (

31,0

91.9

) (

34,8

76.9

) (

38,1

81.7

) (

39,8

16.1

)Fi

nanc

e co

st p

aid

(34

5,66

0.2)

(30

8,64

2.4)

(29

4,42

2.2)

(20

3,33

1.9)

(37

1,31

7.9)

(38

0,04

1.0)

(42

2,49

9.9)

(31

8,75

9.2)

(22

9,75

3.3)

Net

cas

h fr

om f

inan

cing

act

ivit

ies

5,4

97,1

90.9

(3,

401,

669.

8) (

2,10

9,23

2.3)

(2,

413,

423.

8) (

2,33

2,84

0.8)

(2,

167,

883.

9) (

2,97

0,01

6.3)

(3,

437,

772.

0) (

2,87

9,01

2.9)

Cas

h at

the

begi

nnin

g of

the

year

-

1,0

31,3

55.5

5

22,8

07.7

1

,674

,576

.4

2,5

24,6

86.9

1

,605

,685

.0

2,2

71,7

56.4

1

,934

,490

.9

1,2

67,5

88.3

A

dd: N

et in

crea

se in

cas

h 1

,031

,355

.5

(50

8,54

7.8)

1,1

51,7

68.7

8

50,1

10.5

(

919,

001.

9) 6

66,0

71.5

(

337,

265.

5) (

666,

902.

6) (

65,1

13.1

)C

ash

at th

e en

d of

the

year

1,0

31,3

55.5

5

22,8

07.7

1

,674

,576

.4

2,5

24,6

86.9

1

,605

,685

.0

2,2

71,7

56.4

1

,934

,490

.9

1,2

67,5

88.3

1

,202

,475

.2So

urce

: C

ompa

ny F

inan

cial

s an

d G

loba

l Res

earc

h


�0� Egypt Steel Sector July 2009

Tab

le 4

1: F

act

Shee

tA

l Ezz

Dek

heila

Ste

el C

ompa

ny –

Ale

xand

ria

(EZ

DK

)20

0520

0620

0720

0820

09 (

F)

2010

(F

)20

11 (

F)

2012

(F

)20

13 (

F)

Pro

fita

bilit

yG

ross

Pro

fit M

argi

n38

.8%

42.9

%40

.1%

38.9

%27

.1%

38.5

%38

.6%

38.8

%38

.9%

EB

ITD

A M

argi

n37

.2%

41.1

%37

.8%

36.9

%24

.7%

36.0

%36

.2%

36.6

%36

.6%

Ope

ratin

g M

argi

n31

.6%

35.2

%32

.9%

33.2

%19

.4%

30.5

%31

.2%

31.8

%32

.0%

Net

Pro

fit M

argi

n (B

efor

e T

ax)

34.1

%32

.3%

32.6

%31

.5%

16.8

%27

.1%

28.2

%29

.7%

30.3

%N

et P

rofi

t Mar

gin

(Aft

er T

ax)

30.1

%24

.6%

25.4

%25

.2%

13.2

%21

.3%

22.2

%23

.4%

23.8

%T

urno

ver

rati

osIn

vent

ory

turn

over

3.26

3.38

3.8

3.75

3.75

3.75

3.75

3.75

3.75

Rec

eiva

bles

turn

over

40.3

931

.51

103.

0925

2.81

105.

3710

5.37

105.

3710

5.37

105.

37Pa

yabl

es tu

rnov

er5.

135.

526.

36.

098.

256.

135.

995.

815.

74N

et w

orki

ng c

apita

l tur

nove

r14

.71

27.4

985

.11

(43.

28)

5.03

5.41

6.79

7.39

8G

FA tu

rnov

er1.

271.

241.

140.

881.

281.

291.

21.

151.

13N

FA tu

rnov

er0.

810.

750.

640.

460.

630.

580.

490.

430.

37A

sset

turn

over

1.21

1.05

1.03

0.88

1.07

1.07

0.92

0.77

0.71

Lev

erag

e R

atio

sD

ebt/T

otal

Ass

ets

44.0

%42

.8%

40.5

%39

.3%

50.4

%49

.0%

43.3

%33

.6%

28.2

%D

ebt/E

quity

44.0

%42

.8%

40.5

%39

.3%

50.4

%49

.0%

43.3

%33

.6%

28.2

%In

tere

st c

over

age

7.4

9.3

10.1

19.5

4.6

6.7

6.8

9.4

13.2

Ret

urn

Rat

ios

Ret

urn

on a

vera

ge a

sset

s24

.9%

22.1

%25

.4%

30.3

%11

.3%

20.0

%23

.3%

28.3

%32

.7%

Ret

urn

on a

vera

ge e

quity

24.9

%22

.1%

25.4

%30

.3%

11.3

%20

.0%

23.3

%28

.3%

32.7

%R

etur

n on

inve

sted

cap

ital

30.8

%31

.3%

34.0

%48

.3%

20.1

%32

.4%

39.5

%45

.0%

50.2

%V

alua

tion

Rat

ios

Num

ber

of S

hare

s (0

00s)

13,

667.

8 1

3,66

7.8

13,

667.

8 1

3,36

4.4

13,

364.

4 1

3,36

4.4

13,

364.

4 1

3,36

4.4

13,

364.

4 M

arke

t Cap

as

at y

ear

end

(LE

000s

) 1

1,60

7,21

4.4

8,7

93,2

94.6

11,

103,

967.

3 9

,865

,342

.4

9,8

89,6

65.6

9

,889

,665

.6

9,8

89,6

65.6

9

,889

,665

.6

9,8

89,6

65.6

M

arke

t Pri

ce (

LE

at p

erio

d en

d) 8

49.2

6

43.4

8

12.4

7

38.2

7

40.0

7

40.0

7

40.0

7

40.0

7

40.0

D

ivid

end

anno

unce

d (

LE

/Sha

re)

142

.0

122

.0

141

.9

210

.0

76.

2 1

23.3

1

38.3

1

51.4

1

57.9

D

ivid

end

yiel

d16

.7%

19.0

%17

.5%

28.4

%10

.3%

16.7

%18

.7%

20.5

%21

.3%

Div

iden

d pa

yout

rat

io81

.7%

83.5

%86

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Company

Al Ezz Steel Rebars Co. (Ezz Steel)

Al Ezz Dekheila Steel Company- Alexandria (EZDK)

Recommendation

Buy

Buy

Reuters Ticker

ESRS.CA ESRS:EY IRAX.CA IRAX:EY

Price (LE.)

12.7

740.0

Disclosure

1,10 1,10 1,10 1,10

Disclosure Checklist

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