Posted on 21 Feb 2017
Ann Joo Resources Bhd’s upcoming fourth quarter for financial year 2016 (4QFY16) results could see better earnings on higher sales volume and margin expansion. The near-term demand outlook is bright as we expect tight supply of bars/rods in 2017.
Coupled with higher margin expectations, we have raised our FY2017 to FY2018 EPS forecasts by 13%/12%. Our new TP of RM2.65 (+6%) is based on 10 times price-to-earnings ratio (mean) on a diluted FY2017 earnings per share (EPS), shifting from asset-based valuation on improved earnings outlook.
We estimate 4QFY16’ net profit to be higher quarter-on-quarter (q-o-q) at RM30 million to RM40 million (3QFY16: RM23 million), bringing FY2016 core net profit to RM127 million to RM137 million (FY2015: RM136 million net loss) and meeting 100% to 108% of our full-year forecast.
The potentially stronger results could be due to higher sales volume, as imports have waned on the implementation of safeguard duties in September 2016; and potential margin expansion as the rally in steel average selling prices (ASPs) (around +20% q-o-q) has outpaced the hike in raw material cost (largely procured before the price rally in October 2016).
We estimate that the industry’s effective rolling mills utilisation rate could be high at around 70% presently.
We also understand that there is tremendous interest in longer-term sales contracts (to lock in both volume and ASPs) but Ann Joo may not want to lock in the ASPs as it would limit its earnings upside.
That said, the potential reactivation of a key mill (on better profitability) and the entrance of China’s Alliance Steel may see the tight supply ease in 2018.
We maintain our FY2016 EPS estimates but raise our FY2017 to 2018 EPS forecasts by 13/12% as we impute for minimal margin expansion (+1-percentage points) after we update for the latest ASPs and raw material costs; and higher pig iron sales (+25%). We now project Ann Joo’s net profit to grow 17% in FY2017. However, after imputing for the potential dilution from its redeemable convertible preference shares (30% conversion rate), the growth of our FY2017 diluted EPS is lower at 9%. — Maybank IB Research, Feb 20
