Investment Highlights

• We maintain our HOLD recommendation on Ann Joo Resources (Ann Joo) with a lower FV of RM1.32 (from RM1.41 previously) based on 8x revised FY20F FD EPS of 16.5 sen. We cut FY19F and FY20F earnings by 30% and 7% respectively, having lowered average selling price (ASP) in the local market resulting from the competition, coupled with the uncertainty on continuity of mega infrastructure projects in Malaysia.

• Ann Joo’s FY18 core net profit of RM139mil (adjusted for a RM15.1mil allowance for inventories written down and a RM25.2mil compensation for late delivery of plant) came in within our forecast but beat consensus estimates by 13%.

• FY18 core net profit declined 30% YoY on the back of: (1) depressed ASP of RM2,200/tonne (vs. RM2,600/tonne a year ago based on our estimates); (2) higher 12-month trailing average iron ore price of US$75/MT (from US$65/MT previously); and (3) increased 12-month trailing average coking coal price of US$222/MT (from US$204/mt previously). Meanwhile, the lower ASP in 4Q versus the first nine months of FY18 was due to a new foreign player in the local market.

• Ann Joo guided for a challenging 1H2019 on the back of sustained depressed selling prices, while raw material costs stay elevated, particularly iron ore due to supply disruptions following the collapse of Vale dam in Brazil. However, there could be some breathing space for steel players in 2H2019 with improved demand driven by the resumption of the LRT3 project.

• We now assume a lower ASP for FY19F-21F at RM2300- RM2460/tonne (from RM2380-RM2460/tonne) underpinned by the stiff competition. We also raise our assumption of iron ore price to US$75 to reflect the supply cut of the material. However, we are keeping our sales volume growth at only 0%–1% for the next three years on the back of the lower steel demand growth in the local market.

• We remain cautious on Ann Joo as its fortunes as a long steel player are inevitably tied to construction sector, of which prospects have weakened following the cutbacks on public infrastructure project on grounds of fiscal prudence. However, Ann Joo will still 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 - 27 Feb 2019