Maybank Research sees better earnings for Ann Joo in H2

Ann Joo's long term profitability hinges on measures to curb cheap imports of bars and rods from China

KUALA LUMPUR: Maybank Investment Bank Research expects Ann Joo Resources to report better earnings in the second half of 2017 after a weaker second quarter due to seasonally softer demand and higher raw material inventory costs. 

It said on Wednesday the better financial performance in H2 would hinge on the recovery in sales volume and average  selling prices (ASPs) recover as construction activities pick up pace again. 

“We maintain our earnings forecasts which have already imputed for the weaker 2Q17. Maintain Buy and target price of RM3.75, based on unchanged 10 times 2017 price-to-earnings ratio (PER) (mean) on 30% diluted EPS. Ann Joo is a key beneficiary of the construction upcycle in Malaysia,” it said. 

To recap, Maybank Research expects Ann Joo to report substantially weaker net profit for 2Q17 (1Q17: RM74mil) given the: (i) softer industry’s demand for building materials as construction activity slowed during the Hari Raya fasting month and festive season; (ii) lower industry’s ASPs with billets and bars ASPs down 8% on-quarter in 2Q17; and (iii) higher raw material inventory costs, which were procured in 1Q17, used in 2Q17 production. 

“Based on our channel checks, steel bar ASP has risen rapidly to RM2,200 a tonne currently (+14% in a month) as construction activities gained traction and demand for long steel products improved. 

“We also note that the local bar ASP is still at a 12% discount to that of China (June 2017: 18%) and hence, with the better demand ahead, we think the ASP gap may close,” it said.

Maybank Research pointed out Malaysia’s ASPs used to be at a premium to that of China but has gone below that of China since March 2017.      

“We maintain our earnings forecasts which have factored in our expectation of a weaker 2Q17 and better earnings in 2H17. 

“We see stronger demand for building materials in 2H17-2018, underpinned by mega infrastructure projects (KVMRT 2, SUKE, KVLRT 3 and ECRL). 

“We project Ann Joo to chart a record high net profit in FY17 (+26% on-year) but earnings growth to be tepid in FY18 (+2%) due to its capacity constraint (plant utilisation: 85-90%),” it said.