Stock Name: ANNJOO
Company Name: ANN JOO RESOURCES BHD
Ann Joo Resources Bhd
(Sept 20, RM1.96)
Maintain trading buy at RM2.07 with revised target price of RM2.70 (from RM3.50): Our recent meeting with the management indicated that the average selling price (ASP) of domestic steel bar continues to remain stable ranging between RM2,300 to RM2,400 per tonne. The current price has improved from a low of RM1,900 per tonne in 4Q10.
The increase in selling prices is primarily driven by cost-push factors rather than demand-pull. Year-to-date, the spot iron ore price has risen significantly reaching a peak of US$200 (RM628) per tonne from an average of US$160 per tonne in 4Q10. Scrap metal prices have also moved up by some 15% quarter-on-quarter. With raw material prices remaining high, we believe steel bar prices will remain steady within the RM2,300 to RM2,400 per tonne range in 4Q11.
As such, we are keeping our FY11 ASP assumption at RM2,260 per tonne. We gather that Ann Joo has sufficient scrap metal to last for at least three months of production, allowing the group some purchasing flexibility against the current high scrap metal prices.
Despite the strong news flow on various construction projects, we gather that domestic demand has yet to experience any significant pick-up. Demand is however stable. Ann Joo has consistently managed to sell in excess of 30,000 tonnes of steel bars a month, suggesting that our 405,000 tonne steel bars sales assumption for FY11 is achievable.
Despite our recent revision on our 2011 GDP forecast, we make no changes to our construction growth forecast. We maintain our 6% and 7% construction growth estimates for 3Q11 and 4Q11. However, we are more cautious on the export outlook on the back of the softening global economic outlook especially in developed countries. Against this backdrop, in the medium term we think the current soft sentiment for exports will likely persist.
Despite the existing and potential mega projects like LCCT 2, Second Penang Bridge and MRT, we understand that Ann Joo will maintain its business model, continuing to sell via its distributors instead of supplying directly to construction players and/or to any specific construction project. This is to minimise credit risk as the credit period could extend up to 60 days.
The sintering plant started hot commissioning in April this year and Ann Joo expects the furnace to start commissioning by year-end, barring technical hiccups during the test run. Iron ore for the mini blast furnace will be sourced locally, which is some US$20 to US$40 per tonne cheaper than global prices, due to lower iron content and freight savings. We believe this will give Ann Joo a cost advantage and aid in margin expansion. As for coke supply, there is no additional purchase to the 50,000 tonnes it has in stock in the medium term.
For 1H11, Ann Joo declared a gross dividend of four sen per share. Although lower than the six sen per share declared in 1H10, we think our full year dividend per share (DPS) estimate of nine sen, based on 30% payout ratio, is achievable, as the group has historically declared higher DPS in 2H11. In addition, its gross cash has more than doubled to RM141 million in 1H11 with a positive free cash flow of RM18 million. At the current price level, the stock offers a decent dividend yield of 4.3%.
Over the past one month, Ann Joo's share price has been affected by the current weak market sentiment, falling by circa 18%. Despite the improvement in domestic demand and stable average selling prices, we are still concerned over the medium-term outlook of the industry given the volatility of raw material costs (iron ore, coal, scrap prices) and the sluggish external environment.
We maintain our 'trading buy' call on Ann Joo. We believe Ann Joo is one of the better long steel players to leverage the infrastructure development theme under the Economic Transformation Programme, given its strong balance sheet and credible management. However, we have revised down our target price to RM2.70 (from RM3.50).
We still tag a 30% discount but on a revised three-year average rolling price-earnings ratio of 11.5 times on CY12 earnings (from 13.8 times previously).'' ' Affin IB Research, Sept 20
This article appeared in The Edge Financial Daily, September 21, 2011.
Company Name: ANN JOO RESOURCES BHD
| Research House: AFFIN | Price Call: TRADING BUY | Target Price: 2.70 |
Ann Joo Resources Bhd
(Sept 20, RM1.96)
Maintain trading buy at RM2.07 with revised target price of RM2.70 (from RM3.50): Our recent meeting with the management indicated that the average selling price (ASP) of domestic steel bar continues to remain stable ranging between RM2,300 to RM2,400 per tonne. The current price has improved from a low of RM1,900 per tonne in 4Q10.
The increase in selling prices is primarily driven by cost-push factors rather than demand-pull. Year-to-date, the spot iron ore price has risen significantly reaching a peak of US$200 (RM628) per tonne from an average of US$160 per tonne in 4Q10. Scrap metal prices have also moved up by some 15% quarter-on-quarter. With raw material prices remaining high, we believe steel bar prices will remain steady within the RM2,300 to RM2,400 per tonne range in 4Q11.
As such, we are keeping our FY11 ASP assumption at RM2,260 per tonne. We gather that Ann Joo has sufficient scrap metal to last for at least three months of production, allowing the group some purchasing flexibility against the current high scrap metal prices.
Despite the strong news flow on various construction projects, we gather that domestic demand has yet to experience any significant pick-up. Demand is however stable. Ann Joo has consistently managed to sell in excess of 30,000 tonnes of steel bars a month, suggesting that our 405,000 tonne steel bars sales assumption for FY11 is achievable.
Despite our recent revision on our 2011 GDP forecast, we make no changes to our construction growth forecast. We maintain our 6% and 7% construction growth estimates for 3Q11 and 4Q11. However, we are more cautious on the export outlook on the back of the softening global economic outlook especially in developed countries. Against this backdrop, in the medium term we think the current soft sentiment for exports will likely persist.
Despite the existing and potential mega projects like LCCT 2, Second Penang Bridge and MRT, we understand that Ann Joo will maintain its business model, continuing to sell via its distributors instead of supplying directly to construction players and/or to any specific construction project. This is to minimise credit risk as the credit period could extend up to 60 days.
The sintering plant started hot commissioning in April this year and Ann Joo expects the furnace to start commissioning by year-end, barring technical hiccups during the test run. Iron ore for the mini blast furnace will be sourced locally, which is some US$20 to US$40 per tonne cheaper than global prices, due to lower iron content and freight savings. We believe this will give Ann Joo a cost advantage and aid in margin expansion. As for coke supply, there is no additional purchase to the 50,000 tonnes it has in stock in the medium term.
For 1H11, Ann Joo declared a gross dividend of four sen per share. Although lower than the six sen per share declared in 1H10, we think our full year dividend per share (DPS) estimate of nine sen, based on 30% payout ratio, is achievable, as the group has historically declared higher DPS in 2H11. In addition, its gross cash has more than doubled to RM141 million in 1H11 with a positive free cash flow of RM18 million. At the current price level, the stock offers a decent dividend yield of 4.3%.
Over the past one month, Ann Joo's share price has been affected by the current weak market sentiment, falling by circa 18%. Despite the improvement in domestic demand and stable average selling prices, we are still concerned over the medium-term outlook of the industry given the volatility of raw material costs (iron ore, coal, scrap prices) and the sluggish external environment.
We maintain our 'trading buy' call on Ann Joo. We believe Ann Joo is one of the better long steel players to leverage the infrastructure development theme under the Economic Transformation Programme, given its strong balance sheet and credible management. However, we have revised down our target price to RM2.70 (from RM3.50).
We still tag a 30% discount but on a revised three-year average rolling price-earnings ratio of 11.5 times on CY12 earnings (from 13.8 times previously).'' ' Affin IB Research, Sept 20
This article appeared in The Edge Financial Daily, September 21, 2011.
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