ANN JOO: BUY at RM2.55, fair value of RM4.20

Ann Joo Resources Bhd
(Aug 4, RM2.61)
Maintain buy at RM2.55 with fair value of RM4.20: Ann Joo Resources Bhd recorded a 2QFY10 net profit of RM71 million, taking its 1HFY10 net earnings to RM112 million. At half time, results constituted 67% of the street’s forecast and 64% of ours. We maintain our FY10F forecast of RM176 million on expectations of a weaker 3QFY10. Ann Joo also proposed an interim dividend/share of six sen — slightly higher than our FY10F DPS forecast of five sen.

Ann Joo’s 2QFY10 earnings grew by a strong 71% quarter-on-quarter (q-o-q), thanks to higher product prices and stronger take-up in export orders. During the quarter, sales of its steel manufacturing products rose from 95,000 to 115,000 tonnes.

In line with this, earnings before interest and tax (Ebit) margins for its manufacturing division expanded four percentage points q-o-q to 15.6%. Nevertheless, we expect the group’s margins to normalise in 3QFY10 as international steel demand weakened considerably in June and July due to the European financial crisis and China’s tightening measures on property.

Ann Joo’s management expects resurgence in global steel demand to gain traction in 4Q2010 — it is already seeing a significant pick-up in regional steel activities. This is aided by China’s recent moves to further reduce overcapacity (for example, the removal of export tax rebates on July 15 for long steel products). Ann Joo took the opportunity to replenish its scrap inventories at an average cost of less than US$400 per tonne during the recent price correction.

On the domestic front, Malaysian bar prices appear to have stabilised at RM2,050 per tonne, from a peak of RM2,400 per tonne in 1Q2010. More importantly, Ann Joo expects positive impact from select roll-out of cornerstone projects, like the new LCCT terminal in Sepang and Second Penang Bridge, to filter through by 1Q2011. While there has been a slight delay, Ann Joo’s management expects to commence testing of its new blast furnace plant by end-September, ahead of its full-commissioning by 4Q2010. It has already locked in some iron ore supplies from domestic sources at less than US$120 per tonne, compared with the international benchmark price of about US$147 per tonne.

We maintain our buy call on Ann Joo with an unchanged fair value of RM4.20, pegged to 12 times its FY10F EPS. We believe investor pessimism on the stock is rather misplaced, as its recent share price weakness represents an excellent opportunity to accumulate. Ann Joo trades at an attractive FY10F-12F PER of only five to seven times on a robust EPS CAGR of 106%. — AmResearch, Aug 4