Building Materials - NEUTRAL - 28 March 2012

Stock Name: ANNJOO
Company Name: ANN JOO RESOURCES BHD

Research House: KENANGA

Price Call: HOLD

Target Price: 1.96

We  maintain  a Neutral  rating  on the  sector  as both  steel  and cement  are currently vulnerableto volatile raw material prices, which may erode margins. We prefer the cementsector over the steel sector as the latter could experience margins erosionfrom the timing difference of current volatile raw material prices.Furthermore, steel customers are still cautious in restocking as the China steeloutput growth is slacking and as the country puts greater focus on its consumersrather than building projects. On the other hand, the cement sector will farebetter comparatively as margins expansion in the sector on lower coal cost aswell as higher sales volume from the expected construction contract awards andexecution particularly from the MRT and LRT extension works will continue tosupport the sector. In the steel sector, we prefer Ann Joo Resources (MARKETPERFORM, TP: RM1.96) over Malaysia Steelworks (MARKET PERFORM, TP: RM1.19) forits well managed production and proven track record. On cement, we do not havea rating for Lafarge Malaysian Cement (NOT RATED) as we have yet to cover thestock.

Steel mills toimprove as more construction activities kick in. Most steel mills are stillbeing hit by the dip in steel prices in the previous quarter although we expectto see a brighter prospect for the overall industry as  it moves into the 2H12 as more construction awardsunder the Economic Transformation Programme (ETP) and 10MP projects are announced.This is because steel takes up  c.20% oftotal property development costs which in return, will help boost sales ordersfor both AJR and Masteel.

Sales volume stillmuted.  In the past few months, steelmills were hit by (1) weakened steel prices and (2) expensive inventories  that have eroded the millers' margins. Nonetheless,we believe this should ease  as the millsbegin to clear their expensive inventories and replenish it with current lowerpriced raw materials. With steel prices expected to spike in 2Q12 on the backof potential restocking by traders and coupled with cheaper scrap costs, weexpect most of the steel mills to see improving margins as they move into 2H12.That said, steel prices are still predominantly determined by China's steel outputgrowth, which has shown a slower growth lately as its government puts greater focuson the consumers rather than building projects. 

Slow down post-CNYbut 2012 on overall will still be good for cement.  On the cement sector, we believe that 2QCY12earnings will be muted given the typically slower construction activitiespost-CNY. Nonetheless,  for the fullyear, we believe that the sector will be  supported  well by  10MP  and ETP  projects  such as  KLIA  2, LRT  Package  A  and executionof new projects such as the  LRT PackageB, Greater KL/KV MRT (Sg BulohKajang) and government land developments at SgBuloh and Cochrane. 

Preference for cementcompanies.  We are more positive oncement companies compared to steel companies given the stable coal cost, whichhas remained sideways c.US$120/MT for the past 10 months, coupled withnormalised rebates of US$10-30/MT. We are not so concerned of theadditional  capacity from Hume (+7% in2013) as we believe this could be absorbed by the greater demand from the ETPprojects such as LRT, MRT, KL International Financial District, WarisanMerdeka, Sg Buloh Malaysia Rubber Land, etc. 

NEUTRAL.  Although we  are  somewhat positive  on  contract flows,  we  are maintaining  a NEUTRAL rating onthe sector as both steel and cement are vulnerable to the current volatility ofraw material prices, which may  erodetheir margins. That said, we prefer cement companies over steel companies dueto the easing international coal prices as opposed to the volatile steel price,which may have an adverse impact to steel margins. We prefer Ann Joo Resources(NEUTRAL, TP:RM1.96) over Malaysia Steelworks (BUY, TP: RM1.44) for its wellmanaged production and proven track record. We do not have a rating for LafargeMalaysian Cement (NOT RATED)  as we haveyet to cover the stock.   

Source: Kenanga