-  Maintain BUY on Ann Joo Resources with an unchanged fair value of RM1.86/share – pegged at 0.9x its FY13F BV/share. Ann Joo’s reported net profit of RM10mil for 1Q13 was in-line at 24% of full-year estimates - and 20% of consensus. Revenue fell 20% YoY to RM488mil on lower export volumes although domestic demand remained firm.

-  The group returned to the black for 1Q13 from a RM1mil loss a year ago on improved cost efficiencies for its blast furnace (BF) that was offset by higher finance cost (+77% at RM14mil). The latter was due to a charge out of interest cost for its BF operations, capitalised in FY11.

-  We expect sequential improvements in operating margins in the coming quarters although the international steel market remains somewhat subdued. The fall in local rebar prices (~RM60/tonne) has lagged behind scrap prices (~RM140/tonne or down 11%) over the last three weeks.

-  Management envisages a robust outlook for domestic steel consumption over the new three years amid a weak international market. Greater emphasis would be placed on the local market in favour of exports, which accounted for up to 40% of sales prior to FY12.

-  To be sure, monthly tenders for the on-going Sg.BulohKajang MRT line is set to rise to 15k-18k tonnes from 10k tonnes under tenders for this month.

-  Ann Joo’s cost reduction initiatives are already bearing fruit; hot metal production has dipped by a hefty 55% from the BF plant’s roll-out in October 2011. It is also pushing for a near 100% sourcing of local iron ore that can result in cost savings of up to 30% viz-a-viz imported supplies.

-  A key risk to the equation centres on the influx of cheap Chinese steel into the domestic markets. On the flipside, the impact on long products is largely confined to wire rods – which exposure Ann Joo has significantly cut back.

-  Furthermore in last February, MITI had proposed antidumping duties on wire rods from selected countries for five years, bar two large millers from China.

-  A final decision has not been made for now. Nevertheless, we note that MITI had on February 1, 2013, already moved to remove duty exemptions on 18 grades of hot-rolled coil.

-  For its trading division, management is pushing for newer markets and industries – including the oil &gas segment where domestic flows are picking up. Topline growth of 20%-25% on sustainable margins for FY13F is realistic.

-  At trough FY13F P/BV of 0.7x, the stock is an excellent proxy to rising steel demand in Malaysia post-elections.

Source: AmeSecurities