Ann Joo Resources Bhd
(April 19, RM2.78)
Upgrade to buy at RM2.84 with higher target price of RM3.45: Ann Joo's share price rose 1% year to date (YTD) and underperformed its peers by 26% on a six-month basis.
We believe its share price performance going forward will be boosted by domestic demand rebound and positive steel price momentum. We upgrade Ann Joo to buy (from hold) with a higher target price of RM3.45 (11 times 2011 price-earnings ratio).
The steelmaker's 1Q10 results are set to be released on April 28. We expect better sequential earnings (4Q09 net profit: RM23 million) on higher sales volume, with 50% to export markets and domestic demand uptick.
1Q10 earnings before interest and tax (Ebit) margin may be comparable to 4Q09's 11% as steel average selling price (ASP) hikes lagged behind scrap cost. However, we expect quarterly earnings momentum to pick up significantly as billet-scrap spread has begun to rise (US$150/tonne now versus US$130/tonne in 1Q10).
Recent steel ASP hikes (+32% YTD) merely reflect higher input costs, but we see sharp above cost ASP hikes going forward on strongly positive steel fundamentals: (i) Demand from traditional Vietnam export market continues to be strong as indicated by March 2010 long steel sales volume which rose to 569,000 tonnes (+60% year-on-year, +88% month-on-month); (ii) The Middle East (ex-Dubai) has resumed its construction activities on economic recovery; (iii) the 15-month high global steel capacity utilisation of 80% in Feb 2010; and (iv) limited capacity addition in 2010-2011 as key global steelmakers are inclined towards expanding flat steel production capacity, rather than long.
Note that China's (47% of 2009 global production) focus is on mergers and acquisitions with the aim of creating three to five globally competitive steelmakers to be in a better position in negotiating iron ore supplies. Additionally, greenfield projects in India face delays due to multiple issues. We raise our target price to RM3.45 (from RM2.60) by raising our target fully diluted 2011 PER to 11 times (from eight times), in line with Ann Joo's historical mean.
We believe investors will re-rate long steel sector on strong demand-price dynamics. Also, it is practically the only sector with cheaply-priced (less than seven times PER) positive news flow in the broader market) - Maybank IB, April 19
This article appeared in The Edge Financial Daily, April 16, 2010.
(April 19, RM2.78)
Upgrade to buy at RM2.84 with higher target price of RM3.45: Ann Joo's share price rose 1% year to date (YTD) and underperformed its peers by 26% on a six-month basis.
We believe its share price performance going forward will be boosted by domestic demand rebound and positive steel price momentum. We upgrade Ann Joo to buy (from hold) with a higher target price of RM3.45 (11 times 2011 price-earnings ratio).
The steelmaker's 1Q10 results are set to be released on April 28. We expect better sequential earnings (4Q09 net profit: RM23 million) on higher sales volume, with 50% to export markets and domestic demand uptick.
1Q10 earnings before interest and tax (Ebit) margin may be comparable to 4Q09's 11% as steel average selling price (ASP) hikes lagged behind scrap cost. However, we expect quarterly earnings momentum to pick up significantly as billet-scrap spread has begun to rise (US$150/tonne now versus US$130/tonne in 1Q10).
Recent steel ASP hikes (+32% YTD) merely reflect higher input costs, but we see sharp above cost ASP hikes going forward on strongly positive steel fundamentals: (i) Demand from traditional Vietnam export market continues to be strong as indicated by March 2010 long steel sales volume which rose to 569,000 tonnes (+60% year-on-year, +88% month-on-month); (ii) The Middle East (ex-Dubai) has resumed its construction activities on economic recovery; (iii) the 15-month high global steel capacity utilisation of 80% in Feb 2010; and (iv) limited capacity addition in 2010-2011 as key global steelmakers are inclined towards expanding flat steel production capacity, rather than long.
Note that China's (47% of 2009 global production) focus is on mergers and acquisitions with the aim of creating three to five globally competitive steelmakers to be in a better position in negotiating iron ore supplies. Additionally, greenfield projects in India face delays due to multiple issues. We raise our target price to RM3.45 (from RM2.60) by raising our target fully diluted 2011 PER to 11 times (from eight times), in line with Ann Joo's historical mean.
We believe investors will re-rate long steel sector on strong demand-price dynamics. Also, it is practically the only sector with cheaply-priced (less than seven times PER) positive news flow in the broader market) - Maybank IB, April 19
This article appeared in The Edge Financial Daily, April 16, 2010.
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