The research house said on Tuesday the JV would create positive synergies between both companies in terms of efficiency, expanding product range and market share.
“However, we are concerned over the impact of macro factors toward the steel demand such as slower global growth which has restricted private spending, as well as uncertainty in government’s future policy,” it said.
Kenanga Research said Ann Joo could integrate into the downstream industrial grade wire rod product which Southern Steel has been doing.
As for Southern Steel, it could use Ann Joo’s billet products to replace imported billets. Besides, the management expect the combined capacity for both iron making and crude steel making to increase to 500,000 tonnes and 2.3 million tonnes respectively.
On the longer term, Ann Joo management also seeks to explore additional synergy by tying up other operations within both parties to further enhance the value of both companies.
Ann Joo targets to complete the corporate exercise by 1HCY20, implying that earnings contribution would only start to kick in after that.
“Hence, we are not overly excited for the near term. However, we acknowledged that the forming of the joint venture between the two parties will bring in positive operational synergies such as cost saving, improved operational efficiency, economies of scale and expertise from both parties.
“We do not change our earnings estimate for now as the development is only at MoU stage. If it materialises, the JV earnings will impact only after 1H 2020.
“However, we note the significant impact to Ann Joo if the JV materialises given that Southern Steel had been a loss maker in the last three quarters ending its latest financial year ending June with a net loss of RM119mil.
“The immediate impact on 2H20 could be negative if the environment does not pick up. We shall update our forecasts once we get clarity on management’s plans on turning around the business.
“Maintain underperform for now with unchanged target price of RM1.10 based on forward PBV of 0.5 times pegged to FY20E book value/share of RM2.20, implying -0.5 standar deviation valuation basis,” Kenanga Research said.
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