Investment Highlights

• We raise our FY17-19F net profit forecasts for Ann Joo Resources (AJR) by 10%, 12% and 10% respectively, and upgrade our FV to RM4.34 from RM3.86 previously, based on 10x revised FY18F fully diluted EPS, in line with the average of its three mid-cycles’ PE multiples of Jan’12–Sep’13, Jun’05–Jun’08 and Sep’10 till now. We maintain our BUY call.

• AJR’s 9MFY17 net profit beat our expectations at 80% of our full-year forecast, but missed market expectations at only 71% of full-year consensus estimates. We believe the variance against our forecast came largely from the better-than-expected average blended steel prices and stronger steel sales volume.

• 9MFY17 net profit increased by 24% YoY largely due to improved average blended steel prices, which was in line with the increase of international steel prices (i.e. ongoing reforms in China to curb steel production has improved international steel prices) and higher steel volume supplied to various domestic infrastructure and large-scale development projects.

• The upgrade in our net profit forecast is to reflect 6%, 6% and 4% higher assumptions for average blended steel prices per tonne at RM2,000, RM2,140 and RM2,250 in FY17-19F respectively, versus RM1,890, RM2,022 and RM2,164 we assumed previously.

• Meanwhile, we raised our volume growth assumptions FY17-18F to 3% and 5% (previously 1% and 3% FY17- 18F) and maintained FY19F growth assumption at 5%. The higher volume growth assumption revision is to reflect stronger domestic demand for steel particularly from major infrastructure projects.

• AJR’s earnings visibility remains good underpinned by: 1) steel production curbs in China on the ongoing reforms structural reforms (particularly, elimination of induction furnaces) which allows AJR to sell in the Asean market which currently relies largely on steel supply from China; and 2) stronger demand for construction steel thanks to the rollout of infrastructure projects.

• We continue to like AJR because: 1) it is one of the dominant local steel players, controlling 20% of the market share; 2) buoyant steel prices in the international market due to production curbs in China, while local steel prices will be further supported by safeguard duties on imported steel till April 2020 (Exhibit 2); 3) rising local demand backed by the rollout of infrastructure projects; and 4) cost optimisation in production which enables AJR to realise better margins than its competitors.

Source: AmInvest Research - 27 Nov 2017