Investment Highlights

• We reiterate our BUY recommendation on Ann Joo Resources (AJR) with unchanged forecasts and FV of RM4.34 per share. Our FV is 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.

• The recent slide in AJR share price was largely triggered by the decline in Chinese steel prices. Steel prices in China have dropped ~20% MoM in January 2018 due to price correction from a high base in Dec 2017 (RMB4,900/tonne equivalent to RM3,000/tonne). Recall, steel prices shot up in Dec 2017 due to the Chinese government's Winter Policy (production curbs between December and March to reduce pollution during the winter season). Currently, steel prices in China are hovering around RMB4,000/tonne (RM2,500/tonne).

• We make no changes to our forecasts as we do not expect steel prices in China to fall further from the current levels as demand is still strong locally in China coupled with further steel sector reforms that will reduce steel production.

• We maintain our assumptions for average blended steel ASP per tonne of RM2,000, RM2,140 and RM2,250 in FY17-19F respectively, and volume growth projections of 3%, 5% and 5% FY17-19F respectively on the back of stronger domestic demand for steel, particularly, from major infrastructure projects.

• We continue to like AJR because of: 1) its dominant position in the local steel market with an estimated market share of 20%; 2) sustained steel prices in the international market due to the phasing out of obsolete steel production capacity in China, while local steel prices will be further supported by safeguard duties on imported steel till April 2020; 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 - 18 Jan 2018