AmInvest Research cuts Ann Joo net profit outlook, retains hold

More upside for steel players

KUALA LUMPUR: AmInvestment Bank Research has cut its FY18-20F net profit forecasts by 11%, 13% and 31% respectively and reduce its fair value (FV) by 20% to RM2.17 from RM2.70, but maintain its hold call.

It said on Monday its new FV was based on eight times revised FY20F fully diluted earnings per share (EPS) of 27.1 sen. 

“We use FY20F (instead of FY19F) as our valuation base year to reflect the potential earnings downturn in FY20F with the completion of major mega infrastructure projects in about two years from now,” it said.

AmInvest Research said the downgrade in its FY18F earnings forecast was to reflect an expected soft 2QFY18 (April–June) as contractors held back from steel purchases on the heels of the surprise 14th general election outcome that threw various public infrastructure projects into limbo. 

It also lowered its outlook for sales volumes and prices in FY19-20F. It now assumes FY18-20F sales volume growth of 0% to 2.5% per annum (from 3% previously) and average steel selling prices of RM2,465-2,565/tonne (from RM2,500-2,700/tonne previously).

“The key takeaway from our recent visit to the company is that Ann Joo’s earnings will not fall off the cliff. This is because key public infrastructure projects that are spared the axe will still require a substantial amount of steel input. 

“More so when mega projects like the MRT2 and LRT3 are still in relatively early stages of implementation with completion of only 20%-30% and 10% respectively. These will still consume a fair bit of steel over the next 24 months at the least,” it said.

AmInvest Research said also, Ann Joo sees opportunities in the export markets such as Thailand and Indonesia. 

It said despite the intense competition (against Russian, Chinese and Iranian players, etc), exporters like Ann Joo often times can lock in good prices for certain products (for instance, billet at US$550/tonne at present) due to short-term mismatches of demand and supply.

Export sales made up 15% of Ann Joo’s total sales volume in FY17.

“The fortunes of Ann Joo, a long steel player, are inevitably tied to the construction sector, of which prospects have weakened following the cutbacks on public infrastructure project on grounds of fiscal prudence. 

“However, Ann Joo will sustain its earnings, underpinned by ongoing construction projects and export sales. It is less vulnerable to a higher electricity tariff thanks to its investment in the hybrid blast furnace electric arc furnace (BF-EAF) technology,” it said.