Ann Joo Resources : Resilient business model BUY

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Ann Joo Resources : Resilient business model    BUY

We upgrade Ann Joo Resources (AJR) to a BUY with a FV of RM3.20 based on 10x FY18F diluted EPS, average of three mid-cycles PE multiples between Jan-12 to Sep-13, Jun-05 to Jun-08 and Sep-10 till present. We forecast the global steel demand to trend marginally upwards by 0.5% (FY17F) and 1.0% (FY18F) from 1.5bil MT currently, underpinned by economic growth in some regions of the world, especially in the emerging economies, mainly driven by the construction sector. Steel demand in Malaysia is expected to trend upwards supported by the country’s resilient growth and domestic spending into infrastructure projects. Meanwhile, global production supply is expected to remain flattish at 1.6bil MT FY17F/FY18F, with an estimated 2.3bil MT annual capacity and average capacity utilisation of ~70%. The ongoing cuts in China steel production due to the recent glut has shown progress and the Chinese government plans to trim further by 50mil MT of its annual capacity of 1.1bil MT and current production level ~800mil MT. Our projection for global steel ASP (ex-work) remained subdued at between US$D500-550 MT, given the ongoing economic reforms in China.  

We continue to like AJR because: 1) it is one of the dominant local steel players, controlling 20% of the market share; 2) ASP is expected to improve with the ongoing China reforms to cut steel supply while local demand is expected to rise by FY17 & FY18, particularly from infrastructure projects; and 3) cost optimisation in the production cost which enables AJR to maintain better margin than its competitors. Hence, we recommend a BUY call at a fair value of RM3.20.

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ECONOMIC HIGHLIGHTS

US : Envisage a smaller or neutral trade gap in 1Q2017

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