Investment Highlights

• We maintain our BUY call, forecasts and FV of RM4.34 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 FY17 core net profit of RM205.4mil met our forecast and consensus estimates.

• The company’s FY17 turnover increased 17% YoY largely attributable to higher selling prices of various steel products (i.e. higher average international blended steel prices resulted from the ongoing reforms in China to curb steel production) coupled with a marginal increase in sales volume tonnage.

• Similarly, its FY17 core net profit rose by 23% on the back of: 1) higher selling steel prices; and 2) marginal increase of steel volume supplied to various domestic infrastructure and large-scale development projects.

• These were partially offset by margin contraction due to time lag effects of higher cost of raw material & fuel (i.e. negative price cost impact) and recognition of overhead cost for scheduled maintenance and the upgrading of dedusting system in 4Q17 (

• Meanwhile we are keeping our average blended steel prices per tonne assumption at RM2,140, RM2,250 and RM2,365 in FY18-20F while maintaining our sales volume growth of 5% per annum in FY18-20F respectively, thanks to strong domestic steel demand particularly from the rollout of the major infrastructure projects.

• AJR’s earnings visibility remains good underpinned by: 1) steel production curbs in China due to the ongoing reforms structural reforms (particularly, elimination of induction furnaces). This 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; 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 - 26 Feb 2018