Ann Joo Resources - Value emerges; trading at trough P/BV of 0.7x BUY

- Maintain BUY on Ann Joo, with a lower fair value of RM1.91/share (previously: RM2.25/share) as we switch our valuation method from P/E to P/BV. Our new fair value is derived after pegging a target P/BV of 0.9x on its FY13F BV of RM2.12/share. This values the stock at the lower end of its historical P/BV range of 0.7x-1.6x (average: 1.2x).

- Taking cue from the sharp steel industry downturn in 3Q12 and lower quarterly profits from Baosteel, we expect Ann Joo’s upcoming 3QFY12 results – (scheduled for release later this evening) to remain weak. There was also a fewer number of working days during the festive Ramadhan/Merdeka celebrations in August to consider.

- That said, we believe the market has probably priced-in the likelihood of a weak 3QFY12 at current levels for Ann Joo – where value has emerged. To be sure, the stock is trading at trough valuations on a P/BV basis at 0.7x. 

- We believe this is unjustified, given the strategic importance of Ann Joo’s blast furnace (BF) that was commissioned last November. The new 500k tonne-plant is only the second such BF in operation within a fast-growing ASEAN market, where there continues to be a void for high-quality semi-finished steel products. 

- We draw comfort that the plant efficiency is improving with an average utilisation rate of over 70%. Its cost structure is also stabilising – if not improving – thanks to a greater shift towards the localisation of more than half of its key raw material mix (e.g. scrap, iron ore) at cheaper prices.

- Beyond the near-term earnings headwinds, Ann Joo’s net profit is set to rebound from RM7mil in FY12F (FY11: RM62mil) to RM84mil in FY13F – with the group looking at resuming export sales after a quiet 3Q. Our optimism is further fuelled by market expectations of a bottoming of the international steel price downcycle in 4Q12 amid restocking activities. 

- Notably, Baosteel recently said that it will raise prices of its major steel products in December – the first in nine months. Such a move could likely be followed suit by Wuhan Iron & Steel and select Japanese BF producers. What’s more assuring are the rising bar-billet spreads, which are turning positive this month (~US$12/tonne) after three consecutive months of negative spreads.   

- An immediate PE re-rating for Ann Joo for FY13F-14F (from 7x-10x to 5x-8x) could be on the cards – if its outstanding 261mil warrants lapse next January. Equally, we project net gearing to peak at 1.4x in FY12F, falling further to 1.3x in FY13F and 1.1x in FY14F – as cash flow from the BF starts to ramp-up on higher capacity.      

Source: AmeSecurities