We are relieved that AJR’s mini BF may help to mitigate the impact from higher  electricity  tariffs.  However,  as  the  newly -commissioned  BF  will still tap on the group’s existing EAF and its rolling mills still consume a lot  of  power  during  production,  we  cut  our  FY14  earnings  by  22% following the tariff hike. That said,  we see limited impact on our bookbased valuation, with our MYR1.04 FV and NEUTRAL call intact.

• BF helps mitigate impact from higher tariff. Ann Joo Resources (AJR) commissioned  its  mini blast  furnace  (BF)  in  late  2012.  Since  then,  the company  has  diverted  part  of  its  steel-making  process  to  the  new furnace,  before  channelling  the  hot  metal  back  to  its  existing  electrical arch furnace (EAF). This  additional  step does  not only improve its EAF efficiency,  but  also  reduces  its  power  consumption  by  ~300  kWhr  per tonne of billet production, as the metal from the BF remains red hot while being channelled to the EAF. Therefore, we expect AJR to be among the steel mills least impacted by the latest tariff revision.
• But no escape from earnings cut. However, as the mini BF technology does  not  completely  eliminate  the  EAF  process,  AJR  would  still  be affected by  the  tariff hike. We  estimate that  ~300 kWhr of electricity  is required  to produce a tonne of billets  at its newly-upgraded plant  while 120-150 kWhr  is required  to manufacture a  tonne of bars or wire rods from  billets.  In  view  of  this,  we  cut  AJR’s  FY14  estimates  by  22%  but leave our FY13 numbers unchanged.
• Reiterate  NEUTRAL.  We  had  initially  projected  for  AJR’s  results  to improve  moving  into  2014  as  steel  demand  is  expected  to  pick  up, spurred  by  the  construction  of  mega  projects  and  Government-backed affordable houses.  However, the tariff revision  just announced  may limit its earnings  recovery  next  year.  This  scenario,  as  well as the  fact that two steel companies were recently designated PN17 status, may  douse investor interest in the sector. All in, we maintain NEUTRAL on AJR, with our book-based MYR1.04 FV premised on 0.5x FY14F P/BV.

Recommendation Chart

Source: RHB