ANNJOO’s FY16 CNP of RM154.1m came in above our and consensus expectations at 123% and 202%, respectively. The positive variance was due to higher-than-expected ASP in FY16 at c.RM1,850/t versus our assumption of RM1750/t. A 9.0 sen dividend was declared in 4Q16, bringing FY16 NDPS to 15.0 sen, above our estimate of 7.0 sen. Upgrade FY17E earnings by 18% to RM189.5m and introduce FY18E earnings of RM193.8m. Maintain OP with a higher TP of RM2.65 (previously RM2.39).

Above expectations. ANNJOO’s FY16 CNP of RM154.1m came in above our and consensus expectations at 123% and 202% due to higher-than-expected steel ASP of c.RM1,850/t vis-à-vis our conservative FY16 ASP assumption of RM1,750/t. Declared 9.0 sen dividend in 4Q16 bringing FY16 dividend to 15.0 sen, above our expected NDPS of 7.0 sen.

Result highlights. 4Q16 CNP of RM56.6m was up 125.8% QoQ on the back of: (i) higher revenue of 45.8% due to higher sales tonnage coupled with higher steel ASP, and (ii) lower effective tax rate (- 19.4ppt). FY16 CNP of RM154.1m improved by 3.6x YoY

underpinned by: (i) lower financing costs (-27.6%), and (ii) improvement in manufacturing and trading margins by 24.7ppt and 4.9ppt, respectively, due to the absence of Chinese steel dumping, leading to better steel ASPs. Balance sheet wise, ANNJOO’s FY16 net gearing of 0.85x improved vis-à-vis 1.3x in FY15; current gearing levels is also within management’s comfort level of <1.0x.

Positively positioned. We believe the current local long steel prices of RM2,150-2,300/t is sustainable in the near to mid-term due to limited imports from China allowing for local manufacturers to dictate local steel prices. The limited imports are attributed to: (i) safeguard measures in place, and (ii) high Chinese rebar prices, which discourage imports due to planned capacity cuts by the Chinese Government. In addition, we note that coke prices - the fuel for iron making has retreated to a more sustainable level of c.USD200/t levels vis-à-vis the previous highs of USD300/t in Nov 2016. That said, we also expect steel demand to accelerate in 2H17 as infrastructure projects dished out in FY16 progress into more advanced stages.

FY17E earnings upgrade. We upgrade our FY17E earnings by 18% to RM189.5m after reducing our coke cost estimates by 30% to USD200/t (from USD285/t). Previously, we had been rather conservative with our earnings estimate which we had assumed a higher coke cost. Note that we had already factored for the higher steel ASPs at RM2,200/t for FY17E. Meanwhile, we introduce our FY18E earnings of RM193.8m which is also based on an ASP assumption of RM2,200/t.

Maintain OUTPERFORM. Post adjustment to earnings, we maintain our OUTPERFORM call with a higher TP of RM2.65 (from RM2.39) which is based on 7.0x FY17E PER. We feel our valuation is fair as we had conservatively pegged it to MASTEEL’s FY10-12 Fwd. PER of 7-10x when earnings were relatively stable due to less fluctuation in steel prices before the Chinese steel dumping incidences. We also wish to highlight that ANNJOO’s FY17E dividend yield of 6.7% is fairly attractive at current price level. Risks include lower-than-expected steel selling prices, lower-than expected steel demand, and higher-than-expected raw material costs.

Source: Kenanga Research - 22 Feb 2017