The Federal Government announced that they will be extending the existing safeguard measure on rebars and wire rods for another 3 years. We are positive on the news given that the safeguard measure will continue to deter imports and provide sustainable price levels for long steel products (rebars and wire rods). While we maintain our FY17-18E earnings as we had previously factored the safeguard into our steel price assumption, we upgrade our TP to RM3.03 (from RM2.65) on the back of a higher FY17E PER of 8x (from 7x). Reiterate OP.

Great news! Yesterday, the Federal Government decided to make the previous preliminary safeguard measure for rebars and wire rods into a definitive measure which will run for another 3 years. To recap, back in Sept 2016, the government had imposed preliminary safeguard duties for long steel products, i.e. rebars and wire rods at 13.4% and 13.9%, respectively. The newly announced definitive safeguard for rebars and wire rods will run at the same rate of 13.4% and 13.9% for the next one year (starting 14/4/17) and subsequently at reduced rates of 12.3%-11.1% (rebars) and 12.9%-11.9% (wire rods) for the next 2 years.

Positive on the news! We are positive on this news with ANNJOO being a direct beneficiary as the safeguard measure will continue to deter imports and serve as an additional barrier for Chinese steel to enter local shores even if Chinese steel prices were to come off as a result of slower construction activities in China. Hence, moving forward, we believe the local steel prices will continue to remain resilient with long steel prices to be >RM2,000/tonne buoyed by the low imports. Currently, local steel prices are trading at healthy levels of RM2,100-2,250/tonne (+30% YoY).

Outlook. Looking ahead, we are expecting local long steel demand to pick up in 2H17 as infrastructure projects dished out in FY16 progresses into more advanced stages. Despite the higher raw material costs in FY17, we believe local manufacturers (such as ANNJOO) are able to protect margins by passing on the higher raw material costs to end users due to the lower Chinese imports.

Maintaining our earnings. We maintain our FY17-18E earnings of RM190m and RM194m, respectively, as we had already factored for the safeguard duties into our steel price assumption of RM2,200/t.

Reiterate OUTPERFORM with higher TP RM3.03. Given the definitive safeguard measures in place, we believe long steel prices in Malaysia will be more stable moving forward translating into sustainable earnings for ANNJOO. Hence, we reiterate our OP call and upgrade our TP for ANNJOO to RM3.03 (from RM2.65) based on a higher FY17E PER of 8.0x (from 7.0x) to reflect the better earnings sustainability. We feel our valuation is fair as it is within 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 saga in FY15. We also wish to highlight that ANNJOO’s FY17E dividend yield of 6.5% is fairly attractive at the 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 - 14 Apr 2017