Maybank IB Research upgrades Ann Joo to Buy, raises TP to RM2.20

KUALA LUMPUR (May 9): Maybank IB Research has upgraded ANN JOO RESOURCES BHD [] to a Buy with and raised it target price to RM2.20 (from RM1.30).

In a note Wednesday, Maybank IB Research said it was turning positive on Ann Joo due to: (i) pent-up local steel demand from 2H12 onwards; (ii) a potential long-term high-margin vendor contract from Petronas; (iii) stronger earnings in 2H12 upon the completion of the fine-tuning of its mini-blast furnace (BF) offsetting continued expected losses in the upcoming 1Q12 results.

“We maintain our forecasts for now but our TP is raised to MYR2.20 (from MYR1.30), as we attach a mid-cycle 1.0x P/BV target (vs. 0.6x trough),” it said.



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CIMB Research maintains Trading Buy on Ann Joo, target price RM1.65

KUALA LUMPUR (April 20): CIMB Research has maintained its Trading Buy call on Ann Joo Resources at RM2.04 with a target price of RM2.39 and said it felt more positive about the company’s 2H12 prospects as CONSTRUCTION [] of mega projects should gain traction then.

In a note Friday, CIMB Research said a minimum wage policy will have limited direct impact on EPS and management is making good progress in its Petronas steel tender.

“A contract with Petronas to supply high-grade steel for its oil and gas projects could boost our FY12 pretax profit estimate by up to 30%.

“We maintain our Trading Buy call and target price basis of 11.3x CY13 P/E. Uncertainty about its blast furnace is why Ann Joo is not an outperform,” it said.



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AmResearch maintains Buy on Ann Joo Resources, lower FV of RM2.73

KUALA LUMPUR (Feb 20): AmResearch is maintaining its Buy on Ann Joo Resources with a slightly lower fair value of RM2.73 a share (previously: RM2.79) to factor in a more muted 4QFY11 and initial start-up cost for its new blast furnace project.

It said on Monday that notwithstanding, it projects FY12F to be a turnaround year for Ann Joo on account of:

(i) Stronger domestic demand with the imminent roll-out of domestic projects, particularly the Sg.Buloh-Kajang (SBK) MRT;

(ii) Earnings are at an inflection point (4.7 times jump in FY12F net profit to RM139 million);

(iii) Normalisation of key input costs (e.g. iron ore, scrap, coking coal); and

(iv) Full-year impact from its blast furnace operations.

“After a recent re-rating of CONSTRUCTION [] stocks, we recommend investors to catch the next MRT ‘wave’ through domestic steel plays,” it said.

AmResearch said with capex front-loaded, Ann Joo is one of only five integrated local suppliers of construction steel that can ride on the imminent roll-out of MRT works, irrespective of the contractors involved – maiden orders may kick in from June onwards.

"Ann Joo’s earnings are at its inflection point, rising from RM30 million in FY11F to RM139 million and RM179 million in FY12F-13F amid attractive forward PEs of 7.0 times and 9.0 times, below its six-year average historical price-to-earnings of 11 times," said the research house.



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RHB Research maintains underweight for steel sector

KUALA LUMPUR (Feb 16): RHB Research Institute is maintaining its Underweight outlook on the steel sector.

It said on Thursday that for the October-December 2011 quarter, most Malaysian steel producers were expected to report losses.

“We believe there is substantial downside risk to 2012 consensus earnings forecasts as well,” it said.

RHB Research said China’s end-demand for steel could turn out to be weaker than expected in the absence of policy easing in its real-estate sector.

It said this was evident in the recent decision by the local authority of a Chinese city to temporarily suspend its home subsidy policy on Feb 12, after introducing it just three days before.

The research house said the pace of consolidation in China’s steel industry has not really gathered momentum in the past few years, resulting in a still highly-fragmented industry with excess and outdated capacity, weighing down on industry margins.

“Decline in raw material costs, particularly iron ore, is likely to be milder than expected due to supply constraints in India (export duty hike), Australia and Brazil (weather disruptions),” it added.

“We have cut FY12-13 EPS forecasts for steel companies under our coverage by 15-23%, largely to reflect lower selling prices for steel products and higher raw material costs.

“We also rationalised our valuation method to PBV (using historical average for each company), for Ann Joo (FV raised to RM1.70, from RM1.40) and Lion Industries (FV raised to RM1.37, from RM1.19),” it said.



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Tough times for local steel players

KUALA LUMPUR: Malaysian steel companies were not spared from plummeting steel prices in the last quarter of 2011.

“The prices will definitely affect the earnings during that period,” said a MIDF Research analyst, who covers the sector, when contacted by The Edge Financial Daily.

This could provide an insight into earnings announcements for the final quarter of last year that local steel players will be posting in the coming weeks.

According to MIDF, margins between steel billets and bars are likely to narrow, potentially causing steel producers to report a net loss in their upcoming quarterly results.

According to data from the London Metal Exchange, spot prices of steel billets last year peaked in mid-August at around US$700 (RM2,107) per tonne, but started on a downtrend soon after.

The price of steel billets, a semi-finished product used to make steel bars, was US$485 per tonne at press time, having fallen 11% from US$545 per tonne in the past month.

According to another analyst who tracks the property sector, local steel bar prices dipped from a high of RM2,500 per tonne during the year to around RM2,120 in 4Q. They are now trading at around RM2,120 per tonne, he added.

Several local steel companies have shown signs of slowing profits resulting from the increase in costs between 2Q and 3Q of 2011, when steel prices were declining.

An example is Ann Joo Resources Bhd. The group sank into the red with a net loss of RM24.54 million in 3QFY11 ended Sept 30 from a net profit of RM32.75 million in 2QFY11.

Lion Industries Corp Bhd also showed signs of slowing net profits over two of its quarters last year in its latest earnings announcement. It posted a net profit of RM27.62 million in 1QFY12 ended Sept 30, 2011 from RM45 million the previous quarter. Besides softening prices, MIDF also said global steel production and utilisation has slowed down.

“Latest numbers from the World Steel Association confirmed our worries about the global steel industry. Global steel production was 1.53 billion tonnes in 2011, up by only 6.8% compared with 15% year-on-year in 2010,” said the research house.

China’s steel production, which accounts for 45% of the world’s output, is the largest globally and has also showed signs of slowing.

In December, China’s steel production rose 4.6% to 52.5 million tonnes, which was 13% lower than its peak of 60.2 million tonnes in May 2011.

Global utilisation has also trended lower at 73.4% in November 2011. “[This was] the lowest since April 2011,” said the research house. China’s slowing production is an indicator of worrying times for the steel industry.

“This is because the steel industry depends heavily on the property market in China,” said the analyst from MIDF, adding that the reason for China’s slowdown is due to its government’s efforts to curb its property market.

Hence, he fears that there could be an oversupply of steel in China, resulting in cheap imports of steel into Malaysia, thus posing a threat to local millers.

Global steel demand is tempered by an economic slowdown in China, and a likely recession in Europe, where orders for steel products for construction, cars and machinery are slowing.

What could potentially help domestic players are local construction projects like the Economic Transformation Programme (ETP) and the 10th Malaysia Plan (MP). The local projects under these programmes include the Klang Valley MRT (the Sungai Buloh-Kajang line), the Gemas-Johor Baru double-tracking railway and the KL International Financial District.

Rather than a sudden surge in demand for steel from these projects, the analyst said “demand will gradually improve because the ETP and the 10th MP will be implemented in stages”.

The analyst also said the construction sector would have the choice of buying cheap imports from China or local players. The former would certainly put the local steel industry at a serious disadvantage.

Larger steel players like Lion Industries or Ann Joo could probably counter the import of steel, but smaller ones may have a tougher time, according to the analyst.

Prices of steel will continue to depend on China and the weakening demand is expected to continue into the rest of the year.


This article appeared in The Edge Financial Daily, February 10, 2012.



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Uncertainty in sector

Steel sector
Maintain neutral: The latest numbers from the World Steel Association confirmed our worries about the global steel industry. Global steel production was 1.53 billion tonnes in 2011, up by only 6.8% compared with 15% year-on-year in 2010. Although steel production in China rose by 4.6% in December to 52.2 million tonnes, it was still 13% lower than the peak in May 2011 of 60.2 million tonnes.

The world’s steel utilisation rate also trended lower at 73.4% in November 2011, the lowest since April 2011. We believe the unresolved European debt crisis coupled with a slower property market in China are among the factors that led to the weakening global steel demand. As these risks are likely to persist in the foreseeable future, we expect the weakening demand trend to continue for the rest of the year.

Local growth in steel demand continues to be driven by ongoing construction projects.

We estimate about RM63 billion in total project value under the Economic Transformation Programme (ETP) and 10th Malaysia Plan will be awarded in 2H12. This should boost demand for steel products this year.

The RM4 billion River of Life project in Kuala Lumpur should boost demand for
steel products this year.

Among the projects are the Klang Valley MRT Sungai Buloh-Kajang Line (RM20 billion), Gemas- Johor Baru double tracking railway (RM8 billion), Menara Warisan (RM5 billion), River of Life (RM4 billion), KL International Financial District (RM26 billion).

China is the biggest consumer of iron ore, coal and copper. The country is also the biggest steel producer, accounting for 45% of world steel production. According to our economist, China is still addressing inflation by tightening lending and curbing investment to prevent overheating and inflation.

More importantly, China’s government continues to curb the residential real estate market, thus bringing down its home prices. As a result of the tightening policy in the property market, China’s steel millers have faced overcapacity, which dragged down steel prices.

We believe there is a possibility that China’s oversupply situation may lead to cheap imports in Malaysia. With steel demand in China staying sluggish, we would not be surprised if there are elements of “dumping” in China’s export strategy moving forward.

The presence of cheap imports will adversely impact local steel players’ earnings.

The prices of upstream/upper-midstream steel products (billets, steel bar, and wire rod) are still depressed. Billet and steel bar prices are now trading at 7.4% and 8% below their one-year historical average prices. In addition, prices of scrap metal, the raw material for steelmaking, have rebounded after the huge decline since September 2011. This means that the margins of billet and steel bar producers are likely to narrow, potentially causing steel producers to report a net loss in the upcoming quarterly results.

Prospects are better for steel millers using iron ore as their feedstock, compared with those using scrap metal. Indeed, the spread between long steel product (billet) prices and iron ore has widened to US$499 (RM1,517) per tonne from US$475 two months ago.



Currently, most Malaysian steel millers are using scrap metal as their feedstock for steelmaking, except for Ann Joo Resources Bhd.

In October 2011, the group pre-commenced its mini integrated blast furnace. With the blast furnace in place, Ann Joo can flexibly switch between scrap metal or iron ore (according to market conditions) for its steel manufacturing. We have a “neutral” call on Ann Joo with a target price of RM1.78.

So far, the share prices of steel counters under our coverage — Lion Industries Corp Bhd, Kinsteel Bhd and Ann Joo have outperformed the KLCI. This was due to the short rally prior to Chinese New Year. Although we are positive on local steel, we do not expect the prices of steel stocks to recover significantly for the rest of this year as industry fundamentals are still weak. Steel product prices have yet to recover while raw material prices are trending higher.

We reiterate our “neutral” call on both Kinsteel (target price: RM0.51) and Ann Joo (TP: RM1.78) and “sell” call with an unchanged TP of RM1.14 on Lion Industries. — MIDF Research



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Building materials: Cement preferred for better fundamentals

Building materials
Maintain neutral: We expect the construction sector to be buoyant on the whole in 2012, but the steel sector will be in a contraction mode.

The cement sector is expected to be more shielded through minimal import threat and falling coal cost. Lafarge Malayan Cement Bhd (“buy”, target price: RM7.60) is our top proxy to the construction sector.

We maintain our “sell” call on Ann Joo Resources Bhd (TP RM1.30) and “hold” call on Kinsteel Bhd (TP 49 sen).

Local building materials demand was subdued from 2009 to 2011 due to low government construction spending. But the momentum is expected to pick up in 2012 as large-scale Economic Transformation Programme (ETP) projects (the MRT, Kuala Lumpur International Financial District, Warisan Merdeka, Sungai Buloh Rubber Research Institute land) are expected to be awarded progressively from 1Q12 onwards.

On the flip side, the pick-up in demand from the ETP projects could be partially negated by a softer property market (which accounts for about 40% of the construction sector). As newly awarded projects take three to six months to hit the ground, we expect the building materials sector to only see meaningful demand growth in 2H12, at the earliest.

In our view, the cement sector offers better fundamentals due to its oligopolistic market structure. Though new capacity is expected to come onstream in early 2013 (+7% in Peninsular Malaysia’s capacity), we expect this to be well-absorbed by demand growth.


Additionally, there is earnings upside for cement players in view of falling coal costs (December 2011: -20% year-to-date). With energy accounting for about 40% of production cost, we estimate that every 1% decline in coal cost contributes to a 0.8% rise in earnings for Lafarge.

Despite expectations of stronger local demand growth in 2H12, we see downside to steelmakers’ earnings owing to a weaker export market (which accounts for 30% to 40% of sales volume).

We are of the opinion that local demand growth will not make up for the export loss in 2012 and margins may be squeezed by a surplus in global supply. We also see dumping risk from China steelmakers, resulting in industry-wide losses, similar to 2005.

We have a “buy” call for Lafarge and derive our TP of RM7.60 by pegging the stock at its peak 17 times 2013 price earnings ratio. The cement maker is also supported by a high net dividend yield of 5.6%. Ann Joo is a “sell” (TP RM1.30) while Kinsteel is a “hold” (TP 49 sen) as we peg the stocks to their trough cycle price to book value valuations of 0.6 times and 0.55 times. We think there is potential upside to Kinsteel’s share price if the official mining award comes through, potentially in 2012. — Maybank IB Research, Jan 11


This article appeared in The Edge Financial Daily, January 12, 2012.



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CIMB Research has technical sell on Ann Joo Resources at RM1.79

KUALA LUMPUR (Dec 14): CIMB Equities Research has a technical sell on Ann Joo Resources at RM1.79 at which it is trading at a FY13 price-to-earnings of 5.6 times and price-to-book value of 0.8 times.

It said on Wednesday that Ann Joo Resources violated its descending triangle pattern on Tuesday.

“We see this as a prelude to more downside ahead. If the candles continue to stay below the support-turned-resistance trend line, expect selling pressure to accelerate soon. Next support levels are RM1.70 and RM1.55,” it said.

CIMB Research said the MACD signal line is hovering in the negative territory while RSI has also hooked downward. The deteriorating technical landscape does not bode well for the stock.

“As long as prices stay below the RM1.84 level, the odds will continue to favour the bears. Put a buy stop at RM1.90, just in case,” it said.



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A surprise loss at Ann Joo

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.



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Ann Joo commissions blast furnace, posts 3Q loss

KUALA LUMPUR: Ann Joo Resources Bhd has commissioned its RM650 million blast furnace in Seberang Perai, Penang, with an annual capacity of 500,000 tonnes.

In a filing with Bursa Malaysia yesterday, Ann Joo said it had successfully commissioned the blast furnace on Oct 16. Its group managing director Datuk Lim Hong Thye said the group is now working to optimise and stabilise the blast furnace operations, and the integration of iron and steel production.

The blast furnace is expected to save up to 40% of the group’s existing electricity consumption for its existing steelmaking plant. The group would also be able to switch between iron ore, coke and scrap as feed materials.

Ann Joo posted a net loss of RM24.5 million for the third quarter ended Sept 30 (3QFY11), compared to RM10.36 million net profit a year earlier, due to diminishing inventory value and foreign exchange losses. This was despite revenue rising 87% to RM625.2 million from RM333.9 million.

Ann Joo said the higher revenue was attributed to recovering international and domestic demand. However, it reported a net loss due to an allowance for diminution in value of inventories of RM38.93 million as a result of contracting steel prices. It also recognised a foreign exchange loss of RM22.5 million due to the weakening ringgit.

Moving forward, Ann Joo said steel prices were expected to go beyond cyclical downturn and remained cautious for 4QFY2011.

Ann Joo closed unchanged at RM1.98 yesterday with 225,000 shares done.


This article appeared in The Edge Financial Daily, November 25, 2011.


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KL shares close lower

Shares of the following companies had unusual moves in Malaysia trading. Stock symbols are in parentheses and prices are as of the close in Kuala Lumpur.

The FTSE Bursa Malaysia KLCI Index fell 1.1 per cent to 1,431.55, its lowest since Oct. 12. The gauge dropped 1.6 per cent this week, its fourth weekly decline. The market will be shut on Nov. 28 for a public holiday.

Ann Joo Resources Bhd, a steelmaker, declined 4 per cent to RM1.90, its lowest level since Oct. 4. The company had a third-quarter net loss of RM24.5 million (US$7.7 million), compared with a profit of RM10.4 million a year earlier.

Coastal Contracts Bhd, a shipbuilder, slid 3.7 per cent to RM1.85, the steepest retreat since Nov. 1. Third-quarter profit dropped to RM36.7 million from RM53.6 million a year earlier.

Genting Bhd, a casino, power and plantation group, dropped 2.5 per cent to RM10.02, its lowest close since Oct. 25. Third-quarter net income fell 22 per cent from a year earlier to RM597.2 million.

MISC Bhd, the world’s largest owner-operator of liquefied natural gas tankers, sank 5.4 per cent to RM5.80, its lowest since Oct. 11. MISC said it will stop operating container vessels after the unit lost US$789 million in three years. The move will result in a one-off US$400 million charge this year, MISC said in a statement.

MNRB Holdings Bhd, a reinsurance company, dropped 7 per cent to RM2.66, the most since November 2008. MNRB had a second-quarter net loss of RM5.9 million, compared with a profit of RM21.3 million a year earlier.

Muhibbah Engineering (M) Bhd, a builder, added 1.9 per cent to RM1.09. Third-quarter net income doubled to RM16.8 million from a year earlier. -- Bloomberg



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OSK maintains 'neutral' call on steel stocks

OSK Research is cutting its fair value for steel firms across the board, citing their below average outlook amid the volatile market as a factor.

The steel stocks are currently offering limited price upside, the research house said, adding that it has placed a "neutral" call on most counters, except Perwaja Holdings Bhd and Kinsteel Bhd.

For Perwaja and Kinsteel, it has maintained its 10 per cent discounted cash flow valuation for the potential iron ore mine as well as "buy" and "trading buy" recommendations, respectively.

Although no official agreement has been signed to date, Menteri Besar of Terengganu was reported to be ready to consent to Perwaja’s application to mine ore in Bukit Besi.

OSK said the sluggishness in the economy also suggested that its earlier anticipated mergers and acquisitions in the sector might now take longer to materialise.

News that Lion Group is liquidating its steel assets has dragged on following a series of negative developments in the European Union and United States, it said.

"Although negotiations are ongoing and there are at least four interested buyers, we suspect the conclusion of such deal may be delayed as buyers may take up their time in bargaining for better pricing amid a weak economic backdrop," OSK said.

OSK also said that the possibility of the Lim family selling 10 - 15 per cent stake in Ann Joo is fading as the share price has fallen too far from the ideal price tag.

The research house is also generally bearish on steel demand, which may potentially be dampened by a weak economic outlook but believes that Asia’s steel market may hold up better than in other parts of the world.

On the local front, various government mega projects to be rolled out under the Economic Transformation Programme will boost the country’s steel requirements, particularly long steel products.

OSK also foresees the Mass Rail Transit (MRT) and the 100-storey Warisan Merdeka as the two projects that may substantially spur steel demand. -- Bernama

Slow construction progress to hurt Ann Joo’s earnings

Ann Joo Resources Bhd (Oct 20, RM2.11)

Maintain neutral at RM2.12 with target price of RM2.16: Ann Joo Resources is expected to announce its 3QFY11 results in November. We are expecting it to record lower 3QFY11 net profit by 7% to 10% against its 2QFY11 net profit of RM35.5 million.

This is due to:

i) higher input costs aggravated by a weakened ringgit against the US dollar and an increase in scrap prices by 27% year-on-year (y-o-y ) during the quarter;
ii) slower revenue growth attributed to weak domestic demand following slower construction activities during Ramadan and Hari Raya Aidilfitri.

Ann Joo’s domestic market contributes roughly 60% of its top line with the remaining 40% from the export market. We believe Ann Joo’s export market rebounded in 3QFY11 as long steel demand resumed after the political unrest in the Middle East and North Africa and post-Japan earthquake. Due to Ramadan and Hari Raya, domestic sales are unlikely to be higher in 3QFY11.

Management has hinted that the RM650 million blast furnace project is likely to take off next year instead of this year. This has no impact on our projections as we will not impute any contribution until the blast furnace begins production.

We reaffirm our expectation that local steelmakers’ exports will continue to be weak for the rest of this year due to mounting concerns over the global headwinds which will affect top line growth and margins. Billet and steel bar prices continue to fall. Billet prices have fallen 4.3% and steel bars by 3.4% in the last two weeks alone. Billet is now US$667.50 (RM2,090) per tonne and bars US$705.

We would not be surprised if Ann Joo, one of the country’s major steel players, sees weak earnings in 4QFY11 due to the decline in prices and demand.

At this juncture, we are maintaining our “neutral” recommendation with a target price of RM2.16 pending the announcement of its 3QFY11 results. We set Ann Joo’s target price by pegging its FY12F earnings per share of 36 sen to a price-earnings ratio of six times, which is one standard deviation below its five-year average PER. — MIDF Research, Oct 20