Investment Highlights

• We cut our FY18-20F net profit forecasts by 23%, 29% and 36% respectively, reduce our FV by 35% to RM 1.60 (from RM 2.17), but maintain our HOLD call. Our new FV is based on 8x revised FY20F FD EPS of 20.0 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 FY18-20F, arising from: (1) the reduction in scope and normalisation of the construction pace (vs. an expedited manner initially) of key mega infrastructure projects, particularly, the MRT2 and LRT3 projects; and (2) an expected cutback in public infrastructure projects in the coming Budget 2019.

• We now assume average steel prices of RM2,400-2,480/tonne (from RM2,465-2,565/tonne previously) and sales volume growth of only 0% to 1.5% per annum (from 2% previously) in FY18-20F.

• Our revised assumption on steel prices 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 2019F and 2.2% in 2020F. However, this is not expected to push up the steel prices as China’s steel consumption is projected to correspondingly fall by 2.0% in 2019F and 2.3% in 2020F on the back a slowdown in GDP growth (Exhibit 2).

• 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/tonne in 2Q to US$72.34/tonne in 3Q (Exhibit 3). Similarly, scrap prices have risen by 4% over the last two months to US$356/tonne currently (Exhibit 4).

• We remain cautious on Ann Joo as its fortunes as a log steel player are inevitably tied to the construction sector, of which prospects have weakened following the cutbacks on public infrastructure project on grounds of fiscal prudence. However, Ann Joo will sustain its earnings, underpinned by ongoing construction projects and exports sales. It is less vulnerable to a higher electricity tariff thanks to its investment in the hybrid blast furnace-electric arc furnace (BF-EAF) technology.

Source: AmInvest Research - 1 Nov 2018