Enter MoU with Southern Steel to Form a Joint Venture Company

ANNJOO has entered into a memorandum of understanding with Southern Steel Bhd (SSB) to form a strategic alliance through a joint venture company (JVCo) in relation to their long product steel manufacturing businesses. Under the proposal, ANNJOO will be selling its entire equity interests including assets and liabilities in Ann Joo Integrated Steel Sdn Bhd, Ann Joo Steel Bhd and Saga Makmur Industri Sdn Bhd to the JVCo for RM907.5mn. Meanwhile, SSB will dispose i) the entire equity interests including assets and liabilities of its units Southern Steel Rod Sdn Bhd, Southern Steel Mesh Sdn Bhd, Southern PC Steel Sdn Bhd and Danstil Sdn Bhd, ii) the business of manufacturing, sales and trading of steel billets and steel bars, including all such business’ assets and liabilities, as well as its support functions and its scrap operations, including all such operations’ assets and liabilities; and iii) certain parcels of SSB’s lands to the JVCo for a total consideration of RM742.5mn.

The new JVCo will be a 45%-associated company of SSB and a 55%-subsidiary of ANNJOO via the issuance of new ordinary shares. The proposal is expected to be completed by 1H2020.

Our view

We are positive on the proposal as synergy could potentially be created through the joint venture. Based on the data from MISIF, the combined capacity for the crude steel production of the JVco shall be about 2.3mn metric tonnes. The proposed JVCo will allow ANNJOO to achieve greater economies of scale through higher bargaining power in purchasing of raw materials and potential larger customer base.

Besides, given ANNJOO’s expertise in upstream operations, the proposal will provide an operational integration to the group from iron making to high-grade finished products. In addition, the new entity will be able to expand its range of products offering. Furthermore, the proposal may help to ease the intense competition amongst the long steel players in Malaysia.

Based on management guidance, ANNJOO intends to maintain its listing status. The companies to be injected by ANNJOO into the JVCo contribute about 70% of ANNJOO’s existing bottom line. After the completion of the proposal, the management intends to expand its iron making capacity in order to support wider downstream activities.

Impact

We maintain our FY19 to FY21 earnings forecasts pending further details and the final binding agreement and approval from the shareholders.

Valuation

No change to our target price of RM1.00, based on unchanged 0.4x CY20 P/B. Maintain Sell call on the stock as the long steel industry is still suffering from soft domestic demand and oversupply issues.

Source: TA Research - 4 Nov 2019