Last week, the Federal Government issued provisional safeguard measures for steel coils and reinforced bars at a duty rate of 13.9% and 13.4% imposed respectively towards exporting countries into Malaysian shores. Positive on the measure as it would boost ANNJOO’s steel re-bars ASPs. Upgrade FY17E earnings by 20% on the back of 8% higher ASP assumption. Post earnings adjustment, upgrade ANNJOO to OUTPERFORM (from MP) with higher TP to RM2.24 (from RM1.69) after switching valuation methodology from 0.76x FY17 PBV to 7.0x FY17 PER.

Approval of provisional safeguard measures. Last week, the Federal Government issued provisional safeguard measures in relation to steel coils and reinforced bars after 4 months of investigations. The measure entails safeguard duties of 13.9% for steel coils and 13.4% for steel rebars which will be imposed towards a list of 40 exporting countries beginning the 26th September 2016.

Positive on the measure. We are not surprised by the implementation of this safeguard measure as local steel manufacturers have been suffering losses/severe margin compressions, especially from China’s steel dumping activities since 2012. The additional safeguard rate on top of the existing 5% import duty would balance out the playing field between local manufacturers and Chinese players effectively shifting local prices higher upwards against Chinese steel prices in China (refer back). Hence, positive on the measure as the safeguard rate would boost ANNJOO’s manufacturing revenue on the back of higher ASPs since majority portion (>60%) of its manufacturing revenue deriving from steel re-bars.

Outlook. Despite the pro-longed overcapacity issue in China, we turn positive on the steel sector as steel prices expected to remain stable premised on (i) China’s depleting steel inventory indicating rising domestic demand there, (ii) closure of loss-making steel mills in China, and (iii) China governments’ strong commitment in reducing steel production capacity through consolidation of steel groups coupled with financial support of RMB100b for worker retrenchment schemes. Hence, we expect our steel-rebar ASP assumptions to be sustainable due to reasons stated above.

Upgrade FY17E earnings by 20%. We upgrade FY17E earnings by 20% on the back of higher ASP assumption (+8% to RM1890/t) in FY17 after factoring in the safeguard measure (refer back). Note that we make no changes to FY16 earnings as we understand (i) local steel importers had been anticipating the approval of the safeguard measure prompting them to stock up on inventories – creating sufficient supply and (ii) gradual steel price increase for the remaining short period of 3 months expected to have little impact towards our FY16 ASP.

OUTPERFORM with a higher target price of RM2.24. Post-earnings adjustment, we increase our target price to RM2.24 (from RM1.69) and upgrade call to OP (from MP) after switching our valuation methodology from 0.76x FY17 PBV to 7.0x FY17 PER. We believe ANNJOO warrants the switch in valuations as safeguard measure would provide less volatility in local steel prices translating towards more sustainable and improved earnings outlook. We believe our valuations of 7.0x PER is justifiable as we had conservatively pegged it to the lower end of MASTEEL’s FY10-FY12 Fwd PER of 7-10x when earnings were relatively stable due to the stable steel prices.

Risks include lower-than-expected steel selling prices, softer-thanexpected steel demand, and higher-than-expected raw material costs.

Source: Kenanga Research - 26 Sep 2016