This article first appeared in The Edge Financial Daily on January 19, 2018

Ann Joo Resources Bhd
(Jan 18, RM3.51)
Maintain buy with an unchanged fair value (FV) of RM4.34: We reiterate our “buy” recommendation on Ann Joo Resources Bhd with unchanged forecasts. Our FV is based on 10 times financial year 2018 (FY18) fully diluted earnings per share (EPS), in line with the average of its three mid-cycles’ price earnings (PE) multiples from January 2012 to September 2013, June 2005 to June 2008 and September 2010 until now.

The recent slide in Ann Joo Resources’ share price was largely triggered by the decline in Chinese steel prices. Steel prices in China have dropped by about 20% month-on-month (m-o-m) this month due to price correction from a high base in December 2017 (4,900 yuan per tonne equivalent to RM3,015 per tonne). Steel prices shot up in December 2017 due to the Chinese government’s winter policy (production curbs between December and March to reduce pollution during the winter season). Currently, steel prices in China are hovering around 4,000 yuan per tonne.

We make no changes to our forecasts as we do not expect steel prices in China to fall further from the current levels as demand is still strong locally in China coupled with further steel sector reforms that will reduce steel production. 

We maintain our assumptions for average blended steel average selling price (ASP) per tonne of RM2,000, RM2,140 and RM2,250 in FY17, FY18 and FY19 respectively, and volume growth projections of 3%, 5% and 5% for FY17, FY18 and FY19 respectively on the back of stronger domestic demand for steel, particularly, from major infrastructure projects. — AmInvestment Research, Jan 18