Luck is turning its back on Egypt's largest steel producer. Sherine Abdel-Razek looks at the strengths and weaknesses of Ezz Steel Just eight months ago, Ezz Steel Company (ESRS) had all what a company needed to be a success story: a market share of more than 40 per cent; a chairman whose political connections opened all closed doors when dealing with regulators; suppliers and even bankers; and future plans that enhance integration between the company's subsidiaries to guarantee cost reduction to a minimum. But the dream-like status of the company came to an end with the 25 January Revolution which dismantled the Mubarak regime and stripped his confident and business tycoon Ahmed Ezz, chairman and main shareholder in Ezz Steel, of all his political credentials, a change in fortune that triggered a series of suit cases accusing Ezz of corruption, profiteering and monopolisation. One of the stock market's blue chips, the company is listed in both the Cairo and London stock exchanges. It saw its shares tumbling by more than 55 per cent this year as the post- revolution stagnation in the property industry sapped demand for its flat steel and rebar products. Investors speculated that the charges against Ezz would damage the company's business. But the loss in share price on the back of fears is just a small part of the problem. Last week, the first verdict against Ahmed Ezz was issued sentencing him to 10 years in prison. While Ezz quit his position on the company board in May and therefore has no links to the company any more, the verdict included annulment of two licences that ESRS had acquired and would have added synergies and secured cost savings for the company. In 2008, the Industrial Development Authority (IDA) gave ESRS two licences. The first was to produce 1.8 million tonnes per annum of direct reduced iron (DRI) in the Ezz Flat Steel (EFS) facility, with a total investment cost of $400 million. The second was to install a billet cluster, also in EFS Ain Sokhna premises. That would have allowed the company to produce both flat steel and semi-finished long products at times when the flat market was suffering a downturn. While the company stopped working on the cluster after the revolution, work on the DRI facility is almost 70 per cent complete. Ezz is financing the DRI facility, with LE0.9 billion of debt already pumped in the project. The stock lost 20 per cent of its value in the two trading sessions following the verdict. Experts' immediate reaction to the verdict was that the company would hardly be hit by the decision on the short run. "Given that the IDA recently decided to grant steel licences at no cost, we expect ESRS to pursue its development plans," said CI Capital's research note. While no senior ESRS spokesperson was available to comment on the decision, the company released a statement on Sunday saying that current production will not be impacted by the decision, as the withdrawn licences were related to expansions that are not yet operational. However, the company's statement acknowledged the negative impact the licences' withdrawal would have on its future plans, adding that it will review all investments on projects whose construction has not yet started, in order to determine which projects should be suspended, given prevailing economic conditions. Both Ezz Steel and its 55 per cent-owned Ezz Al-Dekheila lost LE1.8 billion of their market capitalisation in the three sessions following the verdict. The company said it would appeal the verdict in the Court of Cassation and sources close to senior company representatives noted that it might resort to international arbitration. Meanwhile, taking the verdict's effects into consideration, investment banks have changed their assessment of the company. CI Capital cut the company's long-term fair value by 14 per cent notwithstanding any new licences. Also, it lowered the share price by 26 per cent to LE8.8, which is 18 per cent higher than the share price on Sunday. Still, the company's problems are not expected to end there, as it is exposed to another set of allegations of monopolistic practices and irregularities in the acquisition of Al-Ezz Dekheila, the company's most important investment. Ezz Steel acquired Ezz Al-Dekheila -- then known as Alexandria Iron and Steel. According to the attorney- general and based on lawsuits filed against Ezz, the former secretariat of the National Democratic Party Policies Committee, headed by his friend Gamal Mubarak, Ezz bought Al-Dekheila through a share swap of Ezz Steel rebars with that of Alexandria iron and steel, a step that the attorney-general says is a violation of the capital market law. Other related allegations against Ezz include changing the company name to Ezz Al-Dekheila in order to market and sell both its products and that of Ezz Steel as though they were products of the same company. According to the attorney-general, Ezz cut down Dekheila's production in order to boost his own company's sales, while capitalising on the unified trademark. In addition, he allegedly bought Al-Dekheila's billets and raw iron production at preferential prices which resulted in losses amounting to several million Egyptian pounds. While no one can predict what the court will decide in the case concerning Al-Dekheila, the worst case scenario for Ezz is that the state, which currently owns around 20 per cent of the company, might nationalise it. According to Beltone, should EZDK be nationalised, given that it accounts for 75 per cent of Ezz Steel's expected consolidated earnings, "the rest of Ezz Steel could potentially come to a halt." Beltone went on to explain that although EFS expansion plans have currently been put on hold, stripping away EZDK from the group and cutting out its cash generation, the company would be squeezed to fund its ambitious LE3.6 billion expansion programmes. "Such an outcome would dismantle Egypt's largest steel producer, ahead of a rebuilding process for the country, and petrify any party interested in investing FDI capital into Egypt," noted Beltone. Although the claims made against Ahmed Ezz and Ezz Steel do not hold much ground from a business perspective, market experts believe, there is a risk that these cases are being used as political tools to pacify Tahrir Square protesters, as put by Beltone. Another weak point in ESRS is the high debt in the company's balance sheet. Ezz Steel's total debt, as of fiscal year 2010, stood at LE9.8 billion, of which LE6.5 billion is Dekheila's debt. The remaining LE3.3 billion of Ezz Steel debt is distributed between an approximate of LE1 billion in local bonds and LE2.3 billion from undisclosed lenders. The stagnation in the real estate market is another factor that would add to the burdens on the company. Beltone expects the Egyptian steel industry to witness a contraction of 15 to 20 per cent, year on year, during 2011. However, while tourism, industrial activity, infrastructure, and big ticket real estate -- which together represent 35 per cent of the local rebars market -- will remain largely dormant for the year, private consumption for housing -- representing 65 per cent of the rebar market -- should not stutter. "This segment, to whom Ezz Steel primarily caters to, mainly consists of private home builders looking for a few tonnes to build a one or two storey building, and who are less price- sensitive and more brand conscious than a developer/ contractor looking to buy a much larger order of steel," noted Beltone. Facts about Ezz Steel: - Ezz Steel (ESRS), formerly known as Al-Ezz Steel Rebars Co. is a joint-stock company established in April 1994 to manufacture steel rebars in Sadat City. - It acquired 90.7 per cent of National Al-Baraka for Iron & Steel -- currently known as Al-Ezz Rolling Mills (ERM) -- in 1999. ERM produces straight and coiled rebars in 10 Ramadan City. - ESRS owns 63.1 per cent directly and indirectly of Al-Ezz Flat Steel (EFS), established in July 1998 to produce flat steel, most of which is directed to export markets. - It owns a 55 per cent stake in Ezz Al-Dekheila for Steel, Alexandria (EZDK), formerly known as Alexandria National Iron and Steel Company. EZDK is the largest integrated steel plant in Egypt, with an annual production capacity of 1.78 million tonnes of long products and one million tonnes of flat products. source: CI Capital
