Analysts remain cautious on Ann Joo, fortunes tied to construction sector

KUCHING: Analysts are remaining cautious on Ann Joo Resources Bhd (Ann Joo) given that the group’s fortunes as a log steel player are tied to the construction sector, which has seen cutbacks and reviews on major infrastructure projects.

In a company report, AmInvestment Bank Bhd’s (AmInvestment Bank) reiterated its cautious view on Ann Joo as “its fortunes as a log 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 exports sales,” the research firm said.

“It is less vulnerable to a higher electricity tariff thanks to its investment in the hybrid blast furnace- electric arc furnace ( BFEAF) technology.”

That said, AmInvestment Bank cut its financial year 2018 to 2020 forecasts (FY18-20F) on the group’s net profit by 23 per cent, 29 per cent and 36 per cent respectively.

The research firm also reduced its fair value by 35 per cent to RM 1.60 per share, from RM 2.17 per share previously, but maintained its ‘hold’ call on Ann Joo.

“The earnings downgrade is to reflect lower average steel prices and sales volume growth in FY1820F, arising from the reduction in scope and normalisation of the construction pace (versus an expedited manner initially) of key mega infrastructure projects, particularly, the MRT2 and LRT3 projects and an expected cutback in public infrastructure projects in the coming Budget 2019.”

AmInvestment Bank now assumed average steel prices of RM2,400 to RM2,480 per tonne, from RM2,465 to RM2,565 per tonne previously, and sales volume growth of only zero per cent to 1.5 per cent per annum, from two per cent previously) in FY18-20F.

The research firm’s revised assumption on steel prices was consistent with the steel price outlook in China which produces and consumes about half the world’s steel output annually.

“Steel experts project China’s steel production to ease by 2.8 per cent in 2019F and 2.2 per cent in 2020F.

“However, this is not expected to push up the steel prices as China’s steel consumption is projected to correspondingly fall by two per cent in 2019F and 2.3 per cent in 2020F on the back a slowdown in gross domestic product (GDP) growth.”

AmInvestment Bank has also factored in lower margins due to higher input costs, particularly iron ore and scraps which the research firm estimated make up 65 per cent of total production cost.

“Iron ore prices rose by nine per cent from US$ 66.60 per tonne in the second quarter ( 2Q) to US$ 72.34 per tonne in 3Q.

“Similarly, scrap prices have risen by four per cent over the last two months to US$ 356 per tonne currently.”