EGYPT | STEEL

January 11, 2012

Ezz Steel
DRI license problem is over
The Egyptian Ministry of Industry has decided to reinstate annulled steel licenses issued to four steel producers: Ezz Steel [ESRS], Tiba Steel, Egyptian Sponge Iron, and Beshay Steel. The four companies will pay a total of USD195mn (c.EGP1.2bn) for all the licenses. The terms of the agreement are as follows: a 15% down payment, followed by a grace period of a year and a half, with the remaining 85% to be paid afterwards over five years with equal instalments. We believe that this move by the Government of Egypt is positive for both the local the steel industry as it will allow local steel producers to pursue their plans to meet the strong local demand for steel and for the broader economy, as this implies a healthier macro outlook. As far as ESRS is concerned, we contacted the companys officials who highlighted the following points: ESRS has to pay for two Direct Reduced Iron (DRI) licenses, a total of EGP660mn. The 15% down payment amounts to around EGP100mn. While the source of financing is not yet decided (either cash flows or debt), ESRS has a cash position of EGP1.7bn on the consolidated level and EGP124mn on a standalone basis as of June 30, 2011, which could be utilized. For the first DRI license (a capacity of 1.85mtpa), the company has already completed 85% of the total construction activity for the DRI line located in Ezz Flat Steel (EFS) facilities in Suez. Total construction costs amount to USD440mn or c.EGP2.6bn, financed using 30% equity and 70% debt. The equity portion came through internal financing (9% in 2009, 9% in 2010, 9% in 2011, and 3% in 2012), while the debt portion came in the form of a bank loan of EGP1.7bn. The company expects to start production of the first DRI line in 2H12. For the second DRI license (a capacity of 1.85mtpa), the company expects to start construction activity following completion of the first DRI line. Construction is expected to take two years, with the same construction costs as the first DRI line and the same financing scheme. By adding these two DRI lines to its facilities, ESRS will be able to enhance its operations by introducing a fully-integrated production scheme in its EFSs and Ezz Steel Rebars Co. (ESR)s facilities, similar to the one applied in its Ezz Al-Dekheila [IRAX] facilities (ESRS owns 55% of IRAX). This should improve the EBITDA margins of EFS and ESR (currently at 10%), to gradually reach IRAXs profitability margin of 20% - 25%. Valuation and recommendation: We believe this news should have a positive impact on the companys profitability, and thus shareholders value. A company update will be issued soon to reflect the impact of this news on the companys value. Meanwhile, we maintain our LTFV at EGP15.8/share and TP at EGP8.8/share, and we maintain our Hold recommendation with a High Risk rating for the company.
EGP mn 2009 A 12,589 1,636 13.0% 86 0.7% 49.4x 0.9x 6.4x 3.8x 2010 A 16,621 32.03% 2,110 28.95% 12.7% 252 192.92% 1.5% 16.9x 0.9x 6.0x 4.0x 2011 F 13,640 -17.94% 1,809 -14.26% 13.3% 133 -47.13% 1.0% 31.9x 0.9x 6.4x 4.0x 2012 F 15,359 12.60% 1,943 7.42% 12.6% 152 14.53% 1.0% 27.8x 0.8x 5.6x 3.4x 2013 F 17,244 12.27% 2,553 31.38% 14.8% 164 7.89% 1.0% 25.8x 0.8x 3.3x 1.6x

HOLD (UNCHANGED) LTFV| EGP15.8 (UNCHANGED) TP| EGP8.8 (UNCHANGED)

COMPANY SYNOPSIS Ezz Steel [ESRS] - previously known as Al-Ezz Steel Rebars Co. (ESR) - is a joint-stock company established in April 1994 to manufacture steel rebars in Sadat City. In 1995, ESRS acquired 90.7% of National Al-Baraka for Iron & Steel - currently known as Al-Ezz Rolling Mills (ERM) - which produces straight and coiled rebars in 10th of Ramadan City. ESRS' facilities in Sadat and 10th of Ram adan have a combined production capacity of 1.4mn tons per annum. Furthermore, ESRS owns 63.1% directly and indirectly of Al-Ezz Flat Steel (EFS), established in July 1998 under the provisions of Law No. 8. Its capacity is 1.3mn tons of flat steel per annum, most of which is directed to export markets. ESRS also owns a 55% stake in Al-Ezz Dekheila for Steel- Alexandria (EZDK), previously known as Alexandria National Iron & Steel Company (ANSDK). EZDK is the largest integrated steel plant in Egypt, with an annual production capacity of 1.78mn tons of long products and 1mn tons of flat products. SHAREHOLDER STRUCTURE
Ezz Industries Banks, Insurance Co., Others Free Float Total 64.6% 0.3% 35.1% 100.0%

STOCK DATA
Reuters; Bloomberg Recent price as of 10-Jan-12 No. of O/S shares Market cap 52-wk high / low Avg. daily volume / turnover ESRS.CA; AEZDq.L | ALES EY EGP3.78 543.3 mn EGP2,053.5 mn EGP21.5/ EGP3.28 1.34 mn / EGP10.87 mn

STOCK PERFORMANCE | 52 WEEKS

Volume ESRS EGX 30 - rebased

25 20 15 10 5 0

EGP

mn shares

12.0 10.0 8.0 6.0 4.0 2.0 -

NEWSFLASH

Revenues Growth rate EBITDA Growth rate EBITDA margin Net income Growth rate Net margin PER P/BV EV/EBITDA Net debt/EBITDA

Jan- Feb- Apr- May- Jul- Aug- Sep- Nov- Jan11 11 11 11 11 11 11 11 12

Source: Bloomberg

Hany Mohamed Samy Hany.Samy@cicapital.com.eg

Source: Company financials and CI Capital Research estimates

Contacts & Disclaimer

Research
Amr Hussein Elalfy, CFA | Co-Head of Research Amr.Elalfy@cicapital.com.eg Mona Mansour | Co-Head of Research Mona.Mansour@cicapital.com.eg

CI Capital Securities Brokerage (Egypt & UAE)

Khaled Abd El Rahman | MD & Global Head of Securities Brokerage Khaled.Abdelrahman@cicapital.com.eg

Dynamic Securities
Hesham Khalil | MD Hesham.Khalil@cicapital.com.eg

CI Capital Holding
8 Nadi El-Seid Street, Third Floor Dokki Giza, Egypt Tel: +2(02) 33 38 62 59 Research@cicapital.com.eg www.cicapital.com.eg

Disclaimer
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Rating System
In February 2008, CI Capital Research (CICR) launched a new rating system to give analysts more freedom to be market responsive. This is to make one element of our research more dynamic, namely the advertising of target prices and recommendations. What we did not change is our assessment of the Long Term Fair Value (LTFV), nor have we stopped our detailed industry and company research. What we did is change the target price to trade in the balance of where a share should trade and where we think it will trade. LTFV: As before we continue to estimate a fundamental valuation, largely DCF and/or NAV based. Target Price: The price, which is not necessarily the LTFV, is where the analyst, given all (qualitative as well as financial) information available, thinks the share price can get to within the next 3-12 months. This can be changed at any time on changing facts and perceptions. Recommendations: Our new rating system falls out from the total return relating to the share price performance to the target price, and including any distributions may not be included in the target price calculation. This is shown in the table below, and to be BUY must return over 19%, an arbitrary hurdle rate we think reasonable given prevailing interest rates and risks (Please see table below.)

Rating
Strong Buy Buy Hold Underweight Sell

Potential Upside/Downside
>30% >20%<30% >10%<20% >0% <10% <0%