Investment Highlights

• We cut our FY18-20F net profit forecasts by 11%, 13% and 31% respectively, reduce our FV by 20% to RM2.17 (from RM2.70), but maintain our HOLD call. Our new FV is based on 8x revised FY20F FD EPS of 27.1sen. We use FY20F (instead of FY19F) as our valuation base year to reflect the potential earnings downturn in FY20F with the completion of major mega infrastructure projects in about two years from now.

• The downgrade in our FY18F earnings forecast is to reflect an expected soft 2QFY18 (April–June) as contractors held back from steel purchases on the heels of the surprise 14th general election outcome that threw various public infrastructure projects into limbo. We also lower our outlook for sales volumes and prices in FY19- 20F. We now assume FY18-20F sales volume growth of 0% to 2.5% per annum (from 3% previously) and average steel selling prices of RM2,465-2,565/tonne (from RM2,500-2,700/tonne previously).

• The key takeaway from our recent visit to the company is that Ann Joo’s earnings will not fall off the cliff. This is because key public infrastructure projects that are spared the axe will still require a substantial amount of steel input. More so when mega projects like the MRT2 and LRT3 are still in relatively early stages of implementation with completion of only 20-30% and 10% respectively. These will still consume a fair bit of steel over the next 24 months at the least.

• Also, Ann Joo sees opportunities in the export markets such as Thailand and Indonesia. Ann Joo’s strategy is opportunistic. Despite the intense competition (against Russian, Chinese and Iranian players, etc), exporters like Ann Joo often times can lock in good prices for certain products (for instance, billet at US$550/tonne at present) due to short-term mismatches of demand and supply. Export sales made up 15% of Ann Joo’s total sales volume in FY17.

• The fortunes of Ann Joo, a long steel player, are inevitably tied to the construction sector, of which prospects have weakened following the cutbacks on public infrastructure project on grounds of fiscal prudence. However, Ann Joo will sustain its earnings, underpinned by ongoing construction projects and export sales. It is less vulnerable to a higher electricity tariff thanks to its investment in the hybrid blast furnaceelectric arc furnace (BF-EAF) technology.

Source: AmInvest Research - 23 Jul 2018