Stock Name: ANNJOO
Company Name: ANN JOO RESOURCES BHD
Research House: MAYBANK

Ann Joo Resources Bhd
(Nov 29, RM2.79)
Maintain buy at RM2.86 with target price of RM3.05: Ann Joo Resources' 9MFY10 net profit of RM123 million made up 69% of our and consensus' full-year forecast.

We consider this to be within our expectations as Ann Joo is likely to report a rebound in earnings in 4QFY10 on higher sales volume and better average selling prices (ASPs).

We remain positive on Ann Joo given our expectation of a domestic demand rebound in 2011/12. We maintain 'buy', with an unchanged RM3.05 target price (11 times fully diluted 2011 PER).

Key takeaways from 3QFY10 results: (i) Net profit fell to RM10 million (-77% year-on-year, -85% quarter-on-quarter) on lower manufacturing sales volume of 126,000 tonnes (-21% y-o-y, -45% q-o-q) as management held back sales to the export market in view of weak ASPs. Export sales tonnage fell substantially by 86% q-o-q and only accounted for 13% of total sales volume (2Q10: 50%); (ii) Group earnings before interest and tax (Ebit) margin dropped to 5.7% (-8.2 percentage points y-o-y, -8 percentage points q-o-q) on weak steel ASPs of estimated US$560 per tonne (-10% q-o-q) and higher scrap inventory; and (iii) Net gearing increased to 1.2 times (June 2010: 1 time) due to higher utilisation of trade facilities as inventory level rose to RM1.2 billion (+21% q-o-q).

We understand that domestic steel demand is edging up slowly, driven by the recently awarded KLIA2 project.

Ann Joo has also resumed exports since October, with 20,000 tonnes transacted, and is in the processof concluding another 20,000 tonnes of sales (against 16,000 tonnes in 3QFY10).

We are also encouraged that steel demand in China remains firm, as evident from the rising steel ASPs of US$680 per tonne in China (around 6% premium to our local steel ASPs).

We anticipate earnings to rebound in 4QFY10 owing to restocking activities and better ASPs.

Additionally, Ann Joo's mini blast furnace (+30% billet capacity by January 2011), in the final stage of construction of the auxiliary facilities (underground pipe-laying), will help the company to save costs (lower energy and scrap usage) and catch the domestic steel recovery in 2011/12.

We maintain our earnings forecasts, rating and target price. ' Maybank IB Research, Nov 29


This article appeared in The Edge Financial Daily, November 30, 2010.