Ann Joo Resources Bhd (Nov 25, RM1.90)
Downgrade to sell at RM1.98 with revised fair value of RM1.59 (from RM2.17): Ann Joo’s 3QFY11 net loss of RM24.5 million obviously shocked the market. The loss was mainly attributed to provision of diminution in inventory value amounting to RM37.9 million and unrealised foreign exchange losses of RM22.5 million, which we think were related to its operations. Apart from that, the weaker numbers were attributed to average selling prices (ASP) of its steel products having averaged down in 3QFY11, which shaved off margins.
While Ann Joo’s management appears to be cautious on the near-term outlook, we suspect the company may return to the black in 4Q as steel and raw materials prices have now recovered from the recent lows hit in October 2011. That aside, the ongoing government projects may to a certain extent help to support domestic long steel requirements plus regular contributions from the trading division. The management also confirmed that it finally hot commissioned its mini blast furnace last month but does not expect any interest expense and depreciation to kick in until full commercial operation.
Now that the new blast furnace is discharging 800 to 900 tonnes of hot metal a day, we suspect Ann Joo may start expensing the interest costs and depreciation incurred for this plant from as soon as 1QFY12. Our model shows an additional RM45 million in cost in the first year. As a new plant may take time to attain optimum efficiency and is highly reliant on outsourced metallurgical coke, this may limit the savings from conversion cost. All challenges considered, we are slashing our FY11 by 53.2% and FY12 by 38%.
As the company’s share price has now drifted far away from the ideal disposal price tag, we also see diminishing prospects for the proposed 10% to 15% stake sale of Ann Joo shares by the Lim family materialising anytime soon. Together with the shocking loss in 3QFY11, potential issues with the new blast furnace and poor industry outlook, we are downgrading Ann Joo to “sell” and pushing our price-to-book valuation to -1 standard deviation of its historical trading range to derive our new fair value of RM1.59. — OSK Research, Nov 25
This article appeared in The Edge Financial Daily, November 29, 2011.
Downgrade to sell at RM1.98 with revised fair value of RM1.59 (from RM2.17): Ann Joo’s 3QFY11 net loss of RM24.5 million obviously shocked the market. The loss was mainly attributed to provision of diminution in inventory value amounting to RM37.9 million and unrealised foreign exchange losses of RM22.5 million, which we think were related to its operations. Apart from that, the weaker numbers were attributed to average selling prices (ASP) of its steel products having averaged down in 3QFY11, which shaved off margins.
While Ann Joo’s management appears to be cautious on the near-term outlook, we suspect the company may return to the black in 4Q as steel and raw materials prices have now recovered from the recent lows hit in October 2011. That aside, the ongoing government projects may to a certain extent help to support domestic long steel requirements plus regular contributions from the trading division. The management also confirmed that it finally hot commissioned its mini blast furnace last month but does not expect any interest expense and depreciation to kick in until full commercial operation.
Now that the new blast furnace is discharging 800 to 900 tonnes of hot metal a day, we suspect Ann Joo may start expensing the interest costs and depreciation incurred for this plant from as soon as 1QFY12. Our model shows an additional RM45 million in cost in the first year. As a new plant may take time to attain optimum efficiency and is highly reliant on outsourced metallurgical coke, this may limit the savings from conversion cost. All challenges considered, we are slashing our FY11 by 53.2% and FY12 by 38%.
As the company’s share price has now drifted far away from the ideal disposal price tag, we also see diminishing prospects for the proposed 10% to 15% stake sale of Ann Joo shares by the Lim family materialising anytime soon. Together with the shocking loss in 3QFY11, potential issues with the new blast furnace and poor industry outlook, we are downgrading Ann Joo to “sell” and pushing our price-to-book valuation to -1 standard deviation of its historical trading range to derive our new fair value of RM1.59. — OSK Research, Nov 25
This article appeared in The Edge Financial Daily, November 29, 2011.
