- Maintain BUY on Ann Joo Resources with fair value adjusted
downwards by ~11% to RM2.43/share. We have also lowered our target PE by one
multiple to 11x on a rollover of valuation base to FY13F amid a
weaker-thanexpected 1Q. Our lower target multiple reflects increasing volatility
in global commodity cycles.
- Stripping off unrealised forex gains of RM20mil in 1QFY12,
Ann Joo would have made a net loss of ~RM21mil (4QFY11: +RM11mil). The losses
largely stemmed from continued start-up losses from its blast furnace and
legacy coke supplies bought at higher prices during the precommissioning stage
of its blast furnace (BF). As such, we have conservatively cut our FY12F net
profit forecast by 45% (FY13F-14F: 18% and 24%).
- But, we expect Ann Joo’s prospects to perk up from 2H onwards
on a ramp-up in multi-year domestic infrastructure jobs (e.g. Klang Valley
MRT). In fact, local sales rose 13% QoQ whilst exports nearly doubled.
- To be sure, our channel checks indicate that domestic bar prices
have inched up between 9%-14% at ~RM2,400/tonne-RM2,500/tonne compared with the
start of 2012. Regionally, the billet/scrap spread has also improved for the
third consecutive month to US$197/tonne in April.
- Operationally, management expects its various
costimprovement measures for the BF to start bearing fruits by July/August 2012
via improved plant optimisation and procurement policies (e.g. higher mix of
local iron ore).
- Despite a tough market enviroment, Ann Joo’s trading division
chalked up a commendable 57% QoQ growth in profits on an EBIT margin of 8%.
Further out, the division could receive a major boost from a potential vendor contract
for high-grade steel under PETRONAS’s massive five-year capex programme. We
gather that the value of these contracts could exceed RM200mil annually.
- Ann Joo stands a good chance to land the PETRONAS deal, as
it is the sole local stockist that specialises in highgrade steel plates, we
believe. We have yet to account for this new venture into our model.
- Even on revised earnings, Ann Joo is still trading below
its 5-year historical PE average of 14x (FY12F-14F FD PE: 9x-11x vs EPS CAGR of
29%) on 0.8x FY12F P/B value.
- After a transitional 2012, we foresee Ann Joo’s net profit
rising to RM134mil in FY13F (+74% YoY) on higher demand and lower cost of
production – as value from its BFemerges. This is augmented by a ramp-up of its
steelmaking capacity to 1 mil tonnes (utilization rate: ~80%).
Source: AmeSecurities
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