FY17 CNP of RM205m came in within our/consensus estimates, accounting for 95%/100% of forecasts. A 13.0 sen dividend was declared, bringing FY17 NDPS to 19.0 sen against our 21.0 sen estimate. No change to FY18E earnings and we introduce FY19E earnings of RM249m. Reiterate OP with unchanged TP of RM4.70 on 11x FY18E PER.

Within expectations. FY17 CNP of RM205m came in within our/consensus accounting for 95%/100% of estimates. A 13.0 sen dividend was declared, bringing FY17 NDPS to 19.0 sen against our 21.0 sen estimate.

Results highlight. FY17 CNP increased 33% YoY on the back of higher revenue (+17%) due to the higher average rebar selling prices of RM2,330 vs. RM1,921 coupled with higher tonnage, and (ii) lower financing cost (-11%) from reduced borrowings. 4Q17 CNP increased 18% QoQ due to: (i) lower effective tax rate (-12ppt) on higher mix of export sales which allows for income tax exemption, and (ii) lower financing costs (-12%). Note that EBITDA margins, QoQ, declined marginally (-0.3ppt) as ANNJOO incurred higher maintenance cost from the upgrading of their de-dusting system in their BF-EAF integrated plant. We note that net gearing improved marginally to 0.64x from 0.65x in 3Q17, which is well below management’s comfortable net gearing level of 1.0x.

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, which are currently trading at RM2,600-2,750 levels. We note that ANNJOO has already felt the impact of domestic sales volume increasing in the early months of FY18. 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 Chinese Government championing capacity cuts and supply side reforms.

Maintaining earnings. We make no changes to our FY18 estimates and introduce FY19E earnings of RM249m. Our FY18-19E earnings are based on rebar price assumption of RM2350-2400 per tonne.

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 FY18E dividend yield of 5.8% 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 - 26 Feb 2018