KUALA LUMPUR: AmInvestment Research has upgraded Ann Joo
Resources to a “buy” with a higher fair value of RM3.20 and expects steel demand to trend upwards.
In a report, the research house said its fair value on Ann Joo was based on 10 times FY18 forecast diluted EPS, average of three mid-cycles’ price-earnings (PE) multiples between January 2012 to September 2003, June 2005 to June 2008 and September 2010 till present.
“We forecast the global steel demand to trend marginally upwards by 0.5% (FY17F) and 1.0% (FY18F) from 1.5 billion tonne currently, underpinned by economic growth in some regions, especially in the emerging economies mainly driven from the construction sector.
“Steel demand in Malaysia is expected to trend upwards supported by resilient growth and domestic spending in infrastructure projects,” AmInvestment said.
The research house said global production supply was expected to remain flattish at 1.6 billion tonne FY17F/FY18F, with an estimated 2.3 billion tonne annual capacity and average capacity utilisation of about 70%.
In addition, it noted that the ongoing cuts in China steel production due to the recent glut have shown progress and the Chinese government plans to trim further by 50 million tonne of its annual capacity of 1.1 billion tonne and current production level about 800mil tonne.
“Our projection for global steel ASP (average selling price ex-work) remains subdued at between US$500-550MT, given the ongoing economic reforms in China,” it added.
Despite the subdued global steel outlook, AmInvestment expects An Joo’s earnings to bounce back in FY17F/FY18F.
“We continue to like Ann Joo because it is one of the dominant local steel players, controlling 20% of the market share, ASP is expected to improve with the ongoing China reforms to cut steel supply while local demand is expected to rise by FY17 and FY18, particularly from infrastructure projects and cost optimisation in production which enables Ann Joo to maintain better margin than its competitors.
"Hence, we recommend a ‘buy’ call at a fair value of RM3.20,” it said.
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