Ann Joo Resources Bhd
(Nov 1, RM1.50)
Maintain hold with a fair value (FV) of RM1.60: We have cut our financial year 2018 (FY18) to FY20 net profit forecasts (F) by 23%, 29% and 36% respectively, reducing our FV by 35% to RM1.60 (from RM2.17), but maintained our “hold” call. Our new FV is based on eight times revised FY20F fully diluted earnings per share of 20 sen. We use FY20F (instead of FY19F) as our valuation base year to reflect the potential further earnings downturn in FY20F with the completion of major mega infrastructure projects in about two years from now.

 
The earnings downgrade is to reflect lower average steel prices and sales volume growth in FY18 to FY20F, arising from: the reduction in scope and normalisation of the construction pace (versus an expedited manner initially) of key mega infrastructure projects, particularly the Mass Rapid Transit 2 and Light Rail Transit 3 projects, and an expected cutback in public infrastructure projects in the coming Budget 2019.

We have now assumed average steel prices oF RM2,400 to RM2,480 per tonne (from RM2,465 to RM2,565 per tonne previously) and sales volume growth of only 0% to 1.5% per annum (from 2% previously) in FY18 to FY20F.

Our revised steel price assumption is consistent with the steel price outlook in China which produces and consumes about half the world’s steel output annually. Steel experts project China’s steel production to ease by 2.8% in FY19F and 2.2% in FY20F. However, this is not expected to push up steel prices as China’s steel consumption is projected to correspondingly fall by 2% in FY19F and 2.3% in FY20F on the back a slowdown in gross domestic product growth.

We have also factored in lower margins due to higher input costs, particularly iron ore and scraps which we estimate make up 65% of total production cost. Iron ore prices rose by 9% from US$66.60 (RM278.39) per tonne in the second quarter (2Q) to US$72.34 per tonne in 3Q. Similarly, scrap prices have risen by 4% over the last two months to US$356 per tonne currently.

We have remained cautious about Ann Joo Resources Bhd as its fortunes as a log steel player are inevitably tied to the construction sector, of which prospects have weakened following cutbacks on public infrastructure projects on the grounds of fiscal prudence. However, Ann Joo will sustain its earnings, underpinned by ongoing construction projects and export sales. It is less vulnerable to a higher electricity tariff thanks to its investment in the hybrid blast furnace-electric arc furnace technology. — AmInvestment Bank, Nov 1