- Maintain BUY on Ann Joo Resources, with our fair value clipped
by 5% to RM1.82/share to reflect a weaker-thanexpected set of 3QFY12 results.
At 0.9x, this pegs the stock at the lower end of its historical band of
0.7x-1.6x.
- Ann Joo reported a 3QFY12 net loss of RM23mil, extending 9MFY12
losses to RM29mil – as it recorded inventory writedowns of RM60mil (9MFY12:
RM56mil) during the sharp global steel downcycle.
- Management attributes this to the rising influx of cheap Chinese steel into the region,
including Malaysia. The current dumping activities by Chinese steel millers –
at eight months – has exceeded the previous six-month interval back in 2H05, as
the supply in-balance this time around is more severe.
- On the flipside, expectations are for this situation to
dissipate by 2Q13 – as the positive impact from the US$157bil infrastructure
stimulus (60 projects) gains traction amid a transition within China’s top
political leadership. To be sure, there are reassuring signs of regional steel
millers gradually raising prices; Baosteel has announced its first price hike
in nine months for its December contracts.
- Granted there is no significant deterioration in the
global macro picture, we remain optimistic that Ann Joo would return to the black
over the next one or two quarters. This stems from regional billet-bar spreads
that have turned positive in November – the first in over two months.
- Another positive is the government’s provisional
anti-dumping duties on imported wire rods (~30% of Ann Joo’s manufactured products),
although a decision may not pan out before the elections.
- Management expects a 20% growth in FY13F volume for its trading
division on rising oil & gas capex. After setting up a warehouse in
Singapore, the group has set its sights on expanding regionally beyond
Malaysia.
- On our revised earnings, we project Ann Joo to swing back
to the black in FY13F with a net profit of RM67mil against a net loss of
RM26mil for FY12F. After a quiet 3Q, the group sees export opportunities during
this winter period – particularly in the Middle East. It recently concluded a
6k tonne-shipment for billets at a US$25-US$30 premium to market prices.
- Trading at trough P/BV valuation of 0.7x, Ann Joo remains
our top pick for leverage to rising steel prices. An immediate PE rerating for
Ann Joo for FY13F-14F (from 7x-11x to 6x-10x) could emerge if its outstanding
261mil warrants lapse next January. Additionally, the group resumed its share
buybacks in October – with 22mil shares (~4% of share cap) held in
treasury.
Source: AmeSecurities
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