Back into the black. AJR finally turned around in 1Q13, with a core net profit of MYR2m from core net losses of MYR15m and MYR10m in 1Q12 and 4Q12 respectively. We see stronger sequential earnings, underpinned by strong local demand and margin expansion on falling raw material costs. We maintain our earnings forecasts, BUY rating and TP of MYR2.10 (1x P/BV). Share price downside is also limited given that it is trading at -1SD to its mean P/BV of 0.8x.

1Q13: Higher sales and margins. On a QoQ basis: (i) the higher revenue (+23%) was driven by both the manufacturing (+23%) and trading divisions (+8%). Sales volumes of steel bars to the domestic market jumped 28% while exports of billets remained weak (14% of total sales tonnage); (ii) EBIT margins improved by 1.1ppts as AJR’s newly-built blast furnace had been fine-tuned to a near-optimal state, which led to greater productivity and cost efficiencies; and (iii) excluding the MYR8m reversal of inventory written down, AJR made a minor core net profit of MYR2m (4Q12: MYR10m core net loss).

Favourable domestic outlook. The domestic demand outlook is likely to be robust in the next three years with favourable local steel bar ASPs (c.10% higher than current international ASPs). However, we understand that the local long steelmakers are concerned about a potential dumping of steel bars from China, and have already submitted a petition for anti-dumping measures to the government as a precaution. Additionally, AJR also expects its trading division to see higher sales in FY13 (+20% YoY), underpinned by likely new orders from the local oil and gas industry.

Forecasts maintained. We maintain our forecasts, as we expect stronger earnings to emanate from: (i) better local sales; (ii) continuous productivity improvements at AJR’s blast furnace; and (iii) margin expansion from falling raw material costs (iron ore: -16% from Jan 2013, scrap: -15%, coke: -7%). Our earnings model incorporates steel bar sales volume growth of 10% p.a. over FY13-15.

Source: Maybank Research - 30 May 2013