ANNJOO’s 1H17 CNP of RM103m was within our and consensus forecasts at 47% and 54% of FY17E full-year estimates, respectively. A 6.0 sen interim dividend was declared as expected. Maintain FY17-18E CNP of RM218- 228m. Reiterate OP with an unchanged TP of RM4.30.

Within expectations. ANNJOO’s 1H17 CNP of RM103m came in line with our and consensus expectations at 47% and 54%, respectively. A 6.0 sen interim dividend declared was in line with our expectations.

Results Highlight. 1H17 CNP increased 41.6% YoY due to the higher average rebar selling prices of RM2,167 vs RM1,855 in 1H16 leading to improved EBITDA margins (+4ppt) despite the 8% decrease in revenue. 2Q17 CNP decreased 61% QoQ due to the lower average rebar selling prices of RM2,088/t vs RM2,253/t in 1Q17 and higher raw material costs i.e. iron ore, scrap and coke translating to lower EBITDA margins (-13ppt). QoQ, rebar prices in 2Q17 retraced from high of RM2,430/t in 1Q17 as local construction activities during that period has yet to move into meaningful contribution stages where higher steel consumption is required.

Outlook. For the rest of FY17, we anticipate a gradual pick-up in infrastructure projects dished out in FY16 to drive demand for 2H17 and continue to buoy local prices at >RM2,000/t level. We believe we can rest our worries on cheap Chinese imports for the medium term considering that safeguard duties (of 13.9% for wire rods/deformed bars in coils and 13.4% for steel rebars) and existing import duties (of 5%) are in place coupled with the higher China prices (currently c.RM2,300/t) due to the Chinese Government championing capacity cuts and increasing infrastructure spending. Furthermore, the recent announcement of China’s government to further cut capacity during the winter months to prevent winter smog has prompted steel prices worldwide to increase further. Currently, we note that our local steel rebars are trading at RM2,450-RM2,600/tonne levels, which are at multi-year highs.

Maintaining Earnings. We maintain our FY17-18E earnings of RM218m and RM228m, respectively, based on average rebar prices of RM2,225/t, (ii) average scrap cost of USD270, and (iii) iron ore cost of USD73.

Reiterate OP with an unchanged TP of RM4.30. Post results, we reiterate our OUTPERFORM call with an unchanged TP of RM4.30 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 6.6% while 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 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 - 23 Aug 2017