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%.
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