- Maintain BUY on Ann Joo Resources, with our fair value clipped by 5% to RM1.82/share to reflect a weaker-thanexpected set of 3QFY12 results. At 0.9x, this pegs the stock at the lower end of its historical band of 0.7x-1.6x.
- Ann Joo reported a 3QFY12 net loss of RM23mil, extending 9MFY12 losses to RM29mil ' as it recorded inventory writedowns of RM60mil (9MFY12: RM56mil) during the sharp global steel downcycle.
- Management attributes this to the rising influx of cheap Chinese steel into the region, including Malaysia. The current dumping activities by Chinese steel millers ' at eight months ' has exceeded the previous six-month interval back in 2H05, as the supply in-balance this time around is more severe.
- On the flipside, expectations are for this situation to dissipate by 2Q13 ' as the positive impact from the US$157bil infrastructure stimulus (60 projects) gains traction amid a transition within China's top political leadership. To be sure, there are reassuring signs of regional steel millers gradually raising prices; Baosteel has announced its first price hike in nine months for its December contracts.
- Granted there is no significant deterioration in the global macro picture, we remain optimistic that Ann Joo would return to the black over the next one or two quarters. This stems from regional billet-bar spreads that have turned positive in November ' the first in over two months.
- Another positive is the government's provisional anti-dumping duties on imported wire rods (~30% of Ann Joo's manufactured products), although a decision may not pan out before the elections.
- Management expects a 20% growth in FY13F volume for its trading division on rising oil & gas capex. After setting up a warehouse in Singapore, the group has set its sights on expanding regionally beyond Malaysia.
- On our revised earnings, we project Ann Joo to swing back to the black in FY13F with a net profit of RM67mil against a net loss of RM26mil for FY12F. After a quiet 3Q, the group sees export opportunities during this winter period ' particularly in the Middle East. It recently concluded a 6k tonne-shipment for billets at a US$25-US$30 premium to market prices.
- Trading at trough P/BV valuation of 0.7x, Ann Joo remains our top pick for leverage to rising steel prices. An immediate PE rerating for Ann Joo for FY13F-14F (from 7x-11x to 6x-10x) could emerge if its outstanding 261mil warrants lapse next January. Additionally, the group resumed its share buybacks in October ' with 22mil shares (~4% of share cap) held in treasury.