9M17 CNP of RM150m came in within street’s estimate at 71% but broadly within ours at 69% as we are anticipating 4Q17 to come in stronger from the higher average rebar selling prices and lower raw material costs. No dividends declared as expected. Maintain earnings estimates and reiterate our OP call with an unchanged TP of RM4.70 based on 11.0x FY18E PER.

Broadly within. 9M17 CNP of RM150m came in within street’s estimate at 71% but broadly within ours at 69% as we are anticipating 4Q17 to come in stronger from the higher average rebar selling prices and lower raw material costs, i.e. coke and iron ore. No dividends declared as expected.

Results highlight. 9M17 CNP increased 54% YoY on the back of higher revenue (+13%) due to the higher average rebar selling prices of RM2,250 vs. RM1,850 and higher tonnage sold. 3Q17 CNP increased 65% QoQ due to the higher average rebar selling prices of RM2,324/t vs RM2,020/t in 2Q17 and also higher tonnage sold as domestic demand had improved albeit gradually. We note that net gearing has also improved to 0.65x from 0.75x in 2Q17.

Outlook. We believe the gradual pick-up in infrastructure projects dished out in FY16 is imminent and will drive demand moving forward, which will continue to buoy local prices at >RM2,000/t level. We believe we can rest our worries over 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.RM2,700/t) due to the Chinese Government championing capacity cuts and increasing infrastructure spending.

Maintaining earnings. We make no changes to our FY17-18E estimates.

Valuations. Post results, we reiterate our OUTPERFORM call with an unchanged TP of RM4.70 based on 11.0x FY18E PER. We believe our valuation is justifiable and undemanding given that it is only marginally higher than MASTEEL’s FY10-12 PER of 7-10x despite ANNJOO’s current position as the most cost efficient upstream steel player in Malaysia coupled with subsided dumping concerns from China. Furthermore, we note that ANNJOO’s dividend policy of up to 60% indicates an attractive FY17E dividend yield of 5.4% 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 to our call include (i) lower-than-expected steel selling prices, (ii) lower-than expected steel demand, and (iii) higher-than-expected raw material costs.

Source: Kenanga Research - 27 Nov 2017