Jack's comment on ANNJOO. All Comments

Jack
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*Annjoo at RM2.35*

*A) Company Background*

- Ann Joo Resources Berhad started as a scrap metal trading company in 1946 and listed on the Main Market of Bursa since 1996. It is an investment holding company engaged in the manufacturing and trading of steel and steel related products. Upon fully acquiring Malayata Steel in 2008, Annjoo became the largest steel manufacturing company in Malaysia.
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Jack
*B) Operational details and business segments*

-There are two major business segments from Annjoo, which are the manufacturing segment and trading segment. Manufacturing segment and trading segment made up 51% and 49% of group’s revenue respectively. Most of its products are used in the construction and engineering field.
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Jack
- For the manufacturing segment, Annjoo is involved in the whole supply chain process, starting from the production of hot metal and molten pig iron from melting the iron ore in the blast furnace. The pig iron are then going through reduction process in the basic oxygen furnace/electric arc furnace to produce molten steel, before going through refinery process and continuous casting into steel billets, bars, shafts, slabs and further rolled into hot-rolled/cold-rolled steel sheets (HRC/CRC).
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Jack
- To note, Annjoo began commencing the commissioning of the first and only modern Blast Furnace in Malaysia in 2011, which is also the first and only hybrid combination of blast furnace and electric arc furnace via hot metal charging technology in Southeast Asia. The modern blast furnace is recognised as one of the lowest cost consumption method in manufacturing long steels, and thus Annjoo is able to maintain its market leader position in Malaysia with solid earnings margin.
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Jack
- For the trading segment, Annjoo distributes various integrated steel products such as carbon steel, stainless steel, steel coils/sheets. Annjoo also provides warehouse and logistic facilities services to supply products comprising a variety of flat and long steel to wide array of economic sectors. Furthermore, the trading segment also has a facility that provides customisation solutions and specialised in the slitting and shearing of steel coils into plates/sheets of various shapes.
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Jack
- The enhanced synergy between both the manufacturing and trading segment allows Annjoo to become a comprehensive steel solution provider for major infrastructure projects.
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Jack
*C) Industry outlook*

- Recently, China’s emissions crackdown have caused supply shortages and pushed local steel prices higher. Meanwhile, key raw material to produce steel products which is iron ore (>70% of raw material cost) has dropped dramatically to US$110(from peak ofUS$227 in March) as China looks to rein in steel production to meet emission targets. To note, China is the world’s biggest importer of iron ore (70% of global demand). This will benefit Annjoo on higher ASP and lower cost.
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Jack
- With China’s carbon neutrality target and emission crackdown likely to reduce its local steel production over the long run: a) crude steel production should have no capacity expansion from 2021 onwards; b) stricter environmental regulations will squeeze out small-sized and low-efficiency capacity producers; and c) sector restructuring to continue with M&As consolidation, steel products’ demand and ASP shall continue to be strong over the coming few years.
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Jack
*D) Financials Analysis*

- Annjoo recorded impressive results in 1H21 with 5-years record high net profit. This is mainly due to strong steel products’ demand, freight/container issues which caused shortages, and higher ASP from booming economy reopening after COVID-19 which have caused steel futures spiking to all-time high. 2Q21 results is one of the best quarter in Annjoo’s history despite operating with limited workforce capacity for 2months during MCO.
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Jack
- If we annualised Annjoo’s 1H21’s EPS of 29sen, Annjoo is now trading at only 4xPE. While the structural issue of China’s carbon emission crackdown and strong steel demand from global infrastructure recovering after economy reopening from Covid-19, Annjoo’s earnings is likely to be strong in coming few years.
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Jack
- If we peg Annjoo to 8x PE, Annjoo’s indicative fair value should be about RM4.64, a 100% upside from current share price of RM2.35.

*Disclaimer: This is not a buy/sell call, just personal research. Kindly trade at your own risk.*
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