KUALA LUMPUR: UOB Kay Hian Malaysia Research is maintaining its Overweight call on the building materials sector with a Buy for Ann Joo
Resources and a target price of RM4.50.
It said on Thursday the target price was based on nine times price-to-earning of 2019F EPS.
Ann Joo is a prime beneficiary of rising demand for long steel products given its hybrid manufacturing facility and effective capital management.
In 2017, it declared a 19 sen dividend (2016: 15 sen) which represents a 47% payout ratio (2016: 45%) and translates into a 5.9% yield.
The research house also pointed out the outlook for steel remains promising, given the sustainably high local steel prices which are supported by industry consolidation in China.
“In addition, we expect local steel demand to gradually improve on the back of the commencement of various mega and infrastructure projects.
“We also reiterate our view that the tariffs imposed on imported steel and aluminium by the US should not have a significant impact on local steel players given that excess supply from US imports should easily be absorbed given the aggressive capacity cuts by China,” it said.
UOB Kay Hian Research also pointed out that in addition, logistically, it would be economically inefficient for US steel suppliers (such as Canada, Brazil and Mexico) to divert excess supply to Asia.
It also noted that based on the MITI weekly bulletin, local steel bar prices improved slightly in March 2018 to RM2,700 a tonne (+0.9% on-month, +22.4% on-year), bringing 1Q18 steel bar prices to RM2,708 (+8.6% on-quarter, +21.3% on-year).
In comparison, China steel bar prices weakened as at 10 Apr 18, down 3.6% on-month and 17.8% from their peak.
“We remain cautious on the heightened risk of a trade war between China and the US, which could exert further pressure on China steel prices and in turn weigh on Malaysia steel prices,” it said.
Steel stocks have been gaining momentum recently after a big sell-off. Share price of Ann Joo recovered by 11.3% from its recent low of RM2.84, while Choo Bee gained 6.2% from its recent low of RM2.26.
The Malaysian steel companies under its coverage have declined about 23.7% from their recent high.
“As we expect steel demand to improve gradually on the back of rising mega and infrastructure projects, we see current share price weakness as an opportunity for investors to accumulate,” it said.
UOB Kay Hian Research said earnings should improve in 1Q18.
Based on its generic model and steel price of RM2,708 a tonne (+8.6% on-quarter), it thinks steel companies may report another strong set of earnings for 1Q18 with gross profit per tonne potentially expanding to RM724 (4Q17: RM708).
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