1Q17 CNP of RM74.0m came in above our and consensus expectations at 39% and 44%, respectively. The positive variances were due to (i) higher than-expected steel ASPs and (ii) lower-than-expected raw material costs. No dividends declared as expected. Post earnings, upgrade FY17-18E earnings by 15% and 18% respectively. Reiterate OP with a higher TP of RM4.30 (previously RM3.75).

Above expectations. As highlighted within our results review note (dated 21st May 2017), ANNJOO’s 1Q17 CNP of RM74m came in above our and consensus expectations accounting for 39% and 44% of estimates respectively. The positive variances were due to (i) higher than-expected ASPs for steel (avg rebar RM2247/t vs our estimates of RM2200/t) and (ii) lower-than-expected raw material costs. No dividends declared as expected.

Result highlights. 1Q17 CNP of RM74.0m was up 31% QoQ on the back of: (i) higher revenue of 6% due to higher steel ASP (avg. 1Q17 rebar prices +13% QoQ), and (ii) improvement in investment income to RM2.7m (from a loss of RM8.4m). ANNJOO’s 1Q17 net gearing of 0.77x continue to show improvement QoQ (previous quarter 0.85x). We note that current gearing levels is also within management’s comfort level of <1.0x.

YoY, 1Q17 CNP was back in the black from a loss position of RM17.8m on the back of improved steel prices (average rebar prices +40% YoY) due to the lack of Chinese dumping activities.

String of good news. Moving into FY17, we anticipate the gradual pick up in infrastructure projects dished out in FY16 to drive demand for 2H17 and continue to buoy local prices of >RM2000/t level. We believe we can rest our worries on cheap Chinese imports for the medium term considering that safeguard measures (+13.9%) and import duties (+5%) are in place coupled with the higher China prices (currently c.RM2300/t) due to the Chinese Government championing capacity cuts and increased infrastructure spending. Last but not least, we note that ANNJOO would be inducted into the Shariah list

(either by May-17 or latest by Nov-17) given that they meet the criteria in which conventional debts over total assets are <33% as of FY16.

Earnings upgrade. We upgrade our FY17-18E earnings by 15%-18% to RM219m and RM228m respectively after (i) upgrading our avg. rebar prices to RM2225/t (from RM2200/t), (ii) reducing our average scrap cost to USD270 (from USD300) and (iii) reducing our iron ore cost to USD73 (from USD90).

Reiterate OP with higher TP of RM4.30 (from RM3.75). Post adjustment to earnings, we reiterate OUTPERFORM call with a higher TP of RM4.30 (from RM3.75) on unchanged 10.0x FY18E PER. Given ANNJOO’s position as the most cost efficient upstream steel player, we believe our 10.0x valuation is justifiable as it is at the higher end of MASTEEL’s FY10-12 PER of 7-10x when steel prices were relatively stable. Furthermore, we note that ANNJOO’s dividend policy of up to 60% indicates an attractive FY17E dividend yield of 6.3% coupled with their optimum capacity size (650k MT of rebar capacity/annum vs annual local rebar demand of c.4.0m MT) in the existing market allows them to constantly operate at an 80-90% utilization rate.

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

Source: Kenanga Research - 24 May 2017