Posted on 23 May 2017
The share price of steel miller Ann Joo Resources Bhd rose on strong steel outlook and positive response to the safeguard measures on cheap steel imports from China.
The counter closed 17 sen higher at RM3.35 yesterday.
According to Kenanga Investment Research, Ann Joo is expected to outperform its peers in the upcoming first-quarter results (Q1’17) in terms of margins.
For Q1’17, Kenanga estimates Ann Joo’s earnings to come in above its expectation at the RM68mil-RM80mil range based on the company’s capacity utilisation of 80%-90% due to the higher-than-expected rebar prices and lower costs.
Compared with other steel millers such as Lion Industries Corp Bhd, Southern Steel Bhd and Malaysia Steel Works (KL) Bhd, Ann Joo has the strongest Q4’16 earnings before interest and taxes margins of 14.4% versus its peers’ 6.2%-8% range, which is relatively a huge gap.
The research unit said Ann Joo is believed to be the most cost-efficient upstream player in Malaysia and stands to benefit the most from the recent safeguard measures. Unlike other upstream players, Ann Joo has a higher inventory, given its background as a seasoned trader.
Kenanga said the company’s inventory level could last for about six months (as of Q4’16) versus its peers’ inventory holding levels, which would last about three to four months.
“We view this positively, as Ann Joo’s higher inventory levels will allow the company to hold back purchases when the raw material prices are high and only buy when the prices are right. At the same time, Ann Joo will still remain in full operation with no disruption in supply,” the research unit said.
Scrap is the major raw material cost for local steel millers, accounting for about 30%-35% of Ann Joo’s operating cost.
While Ann Joo could suffer from the heaviest write-down in inventories should the steel price plunge, the research unit believes that such a risk is currently minimal, as “local steel prices would likely remain at relatively stable levels of over RM2,000 per tonne”.
According to Kenanga, steel prices are expected to be buoyed by the pick-up in demand for local steel from the second half of 2017, lower threats from China’s cheap imports given the safeguard measures, and China’s higher steel prices currently trading at about RM2,300 per tonne.
