Wednesday 27 February 2013

Ann Joo Resources - Returns to the black in 4Q; blast furnace plant improves BUY


- Maintain BUY on Ann Joo Resources with our fair value raised slightly to RM1.86/share (previously: RM1.82/share) on an unchanged target P/BV of 0.9x – as we update for FY12 numbers. This pegs the stock at the low end of its historical band of 0.7x-1.6x.

- Ann Joo returned to the black in 4QFY12 with a net profit of RM9.9mil vs. a net loss of RM23mil in 3QFY12. The improvements were aided by a reversal in inventory writedown (RM34mil) and more importantly, improvements in the efficiencies at its blast furnace (BF) plant.

- FY12 net loss of RM19mil was lower than the deficit of RM25mil that we had expected, although it disappointed the street’s net profit forecast of RM6mil.

- After a tough FY12, we expect a belated recovery in Ann Joo’s FY13F performance, particularly in the 2H. As such, we project the group to swing back to the black with a RM40mil net profit for FY13.

- Firstly, the rebound in regional input prices (iron ore - +50%; scrap: +13%) in January vs. the lows of September 2012 may well have preceded a new cyclical recovery in semi-finished/end steel prices, albeit with a lag.

- Secondly, the Malaysian government’s decision to proceed with anti-dumping duties on imported wire rods from select countries effective from 20 February is another positive step – although enforcement is key.

- This – coupled with a revival of Chinese infrastructure spending – could help mitigate the threat of cheap wire rods into the region, including China. And, Ann Joo is a key beneficiary with wire rods accounting for up to 30% of its product mix.

- Thirdly, domestic steel demand would likely accelerate post-elections. To be sure, our channel checks indicate that local rebar prices have moved up just before the Chinese New Year break.

- Above all, the stock is trading at a deep disconnect vis-avis its fundamentals (37% discount to its FY12 book value). We believe this is unjustified.

- As one of only two BF players within ASEAN, Ann Joo’s expanded capacity (up to 1.1mil tonnes p.a.) puts the group in good stead to benefit from rising steel prices.

- Due to this, we also do not discount Ann Joo making strategic moves to acquire rolling mills within ASEAN to feed its expanded upstream capacity – once the BF mill’s operations are stabilised (current utilisation: ~70%).

Source: AmeSecurities

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