Wednesday 29 February 2012

Ann Joo Resources - Good finish to a difficult quarter BUY


We maintain our BUY recommendation on Ann Joo Resources, and tweak slightly upwards our fair value for the stock to RM2.74/share (unchanged target PE of 12x) to adjust for actual FY11 figures. 

Ann Joo reported a net profit of RM62mil for FY11. The headline profits doubled our forecast, but came in short of consensus (~62%). The positive surprise against our forecast largely came from a relatively good finish to the final quarter. 

Ann Joo managed to deliver a net profit of RM11mil  in 4QFY11 (our expectations: a loss of ~RM20mil) despite a challenging operating environment and start-up costs incurred during the launch of its blast furnace in October. This reflects management’s tight control over its cost structure, particularly in the procurement of raw materials – we believe.  

On a sequential basis, the group returned to the black against a RM25mil loss in 3QFY11 that was mainly inflicted by inventory write-down/unrealised forex losses to  the tune of RM60mil.  

Ann Joo declared a final dividend/share (DPS) of 3.5 sen, bringing FY11 DPS to 7.5 sen or a gross yield of ~1%. This was lower than our forecast of 10 sen.

Barring a sudden deterioration in the global macro picture, we project a 127% YoY growth in FY12F net profit at RM140mil. 

We expect domestic steel demand to gather momentum moving into 2H12 on a step-up in Malaysian infrastructure activities, particularly with the imminent roll-out of the Sg.Buloh-Kajang MRT line.

On the other hand, prices of key inputs appear to have normalised. For instance, the average international scrap price had retracted to the US$460/tonne level last month from US$503/tonne in September 2011.

We expect Ann Joo’s net gearing level to have peak at 1.4x for FY11, improving to 1.1x and 0.9x, respectively, by FY12F-13F, following the successful commissioning of its RM650mil hot metal plant last October. 

Ann Joo remains our top pick for traction to the steel sector. The stock trades at attractive forward FY12F-14F PEs of 7x-9x - below its six-year average historical PE of 11x – against a robust EPS CAGR of 35%. 

Source: AmeSecurities  

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