Investment Highlights

• We cut our FY18-20F earnings by 5%, 15% and 24% in the respective years, trim our FV by 24% to RM2.70 (from RM3.55 previously) and downgrade our BUY call to HOLD.

• Our FV is based on 8x FY19F fully diluted EPS (from 10x previously), in line with the average PE multiples during the transitional period between the mid and trough cycles during May 2008 – May 2009 and Jan 2018 till present. The downgrade in PE multiple is to reflect the less promising prospects in steel sector underpinned by the uncertainty of domestic steel demand, particularly from the construction segment.

• AJR 1QFY18 results met our and consensus full-year expectation at 28% and 27% respectively.

• The company’s 1QFY18 net profit however decreased 17% YoY despite an increase in revenue by 18%. The lower earnings realized in 1QFY18 was largely due to the normalized margins in 1QFY18 vs. the unusually high margins in 1QFY17. Recall, 1QFY17 margins were exceptionally high due the positive cost effect (i.e. time lag effect of cost push). On the other hand, revenue increased YoY on the back of improved selling prices and higher domestic tonnage sold domestically.

• Meanwhile, we are keeping our steel volume growth assumption unchanged in FY18 at 2%, while reducing our sales volume forecast to 3% annually in FY19-20F (from 5% annually) to factor in the lower domestic steel demand growth.

• For steel ASP, our ASP forecast remains unchanged FY18 at RM2,500/MT, but we reduce our ASP forecast in FY19- 20F to RM2,600/MT and RM2,700/MT respectively (vs. RM2,650/MT and RM2,850/MT for FY18-20F).

• The prospects of steel players will weaken further following the government’s decision to put under review various mega infrastructure projects on grounds of fiscal prudence. These projects could potentially be deferred, scaled down or even cancelled, translating to weaker demand for steel.

Source: AmInvest Research - 28 May 2018