Investment Highlights

• We maintain our BUY call, forecasts and FV of RM3.86 for Ann Joo Resources (AJR), based on 10x FY18F fully diluted EPS, in line with the average of its three midcycles’ PE multiples during Jan’12-Sep’13, Jun’05-Jun’08 and Sep’10 till now

• AJR’s 1QFY17 net profit came in at 40% and 43% of our and consensus full-year forecast respectively. However, we consider the results within expectations as ASP was exceptionally strong in 1QFY17 (~RM2,200/MT) due to a dip in steel production in China, and we expect it to moderate over the next three quarters.

• AJR reported net profit of RM74mil in 1QFY17 as compared to RM5.5mil for 1QFY16 and RM46mil in 4QFY16 due to:

1. Steel ASP rallied – ASP for steel has rallied higher compared to 1QFY16. Factors contributing to the higher ASP were higher cost materials and fuels, particularly cooking coal and iron ore prices which surged tremendously. The ongoing closure of the induction furnaces in China continues to strengthen the steel ASP in China and the region.
2. Margin expansion – Profit margins improved significantly due to the time lag effects of cost push, resulted in positive price-cost impact. The operational flexibility via hybrid blast furnace-electric arc furnace production technology resulted in better margin as compared to its peers in the industry

• While AJR indicated that demand to remain soft in the 1HFY17 due to seasonal factors that affect construction activity, AJR’s future earnings visibility remains intact for the year underpinned by: 1) ongoing reforms structural reforms in China to curb steel production by cutting 50mil MT which due by end-June 2017 allow AJR to capitalize export market opportunities within the Asean region which relies on China steel supply; 2) infrastructure projects to kick off in the 2HFY17 resulting in better demand for construction steel; and 3) cost leadership via operational flexibility resulting in better margin as compared to other competitors in the market.

• We continue to like AJR because: 1) it is one of the dominant local steel players, controlling 20% of the market share; 2) ASP is expected to improve with the imposition of safeguard duties on imported steel till April 2020 (Exhibit 2) and the ongoing China reforms to cut steel supply while local demand is expected to rise by FY17 & FY18, particularly from infrastructure projects; and 3) cost optimisation in production which enables AJR to maintain better margin than its competitors.

Source: AmInvest Research - 24 May 2017