1 March 2010

PP 7767/09/2010(025354)
RHB Research
Malaysia Institute Sdn Bhd
Corporate Highlights A member of the
RHB Banking Group
Company No: 233327 -M

R e su l ts / B r ief ing N o t e 1 March 2010

MARKET DATELINE

Ann Joo Resources Share Price

Fair Value
:
:
RM2.80
RM3.53
Anticipates Bumper Earnings in 1HFY12/10 Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (ANNJOO; Code: 6556) Bloomberg: AJR MK

Net EPS Net
FYE Turnover Profit EPS PER # Growth# C.EPS* P/NTA gearing ROE GDY
Dec (RMm) (RMm) (sen) (x) (%) (sen) (x) (x) (%) (%)
2008a 2,222.1 139.2 27.3 -25.8 10.3 - 1.6 1.1 15.7 6.4
2009f 1,303.0 31.6 6.3 -77.0 44.5 - 1.4 1.0 3.5 2.1
2010f 2,301.0 209.4 40.1 537.0 7.0 28.7 1.3 0.9 18.0 8.6
2011f 2,496.3 235.0 45.0 12.2 6.2 35.4 1.2 0.8 18.7 9.6
Main Market Listing / Non-Trustee Stock / Syariah-Approved Stock By The SC # Normalised, ex-forex * Consensus Based On IBES

♦ Below expectations. FY12/09 net profit of RM31.6m came in below our

RHBRI Vs.
Above
Consensus

as well as market expectations, accounting for only 50.8-51.2% of our In Line

forecast and the market consensus. The variance against our forecast Below
came largely from lower-than-expected sales volumes.
Issued Capital (m shares) 522.7
♦ Anticipating margin boost in 1HFY12/10. AJR anticipates profit Market Cap(RMm) 1,463.6
margins to accelerate in 1HFY12/10 on the back of the recent rise in global Daily Trading Vol (m shs) 0.5
steel prices (which will likely be sustained, if not rising further on the back 52wk Price Range (RM) 1.02 – 3.35
of the cost push factor), which outpace its production cost. This is mainly Major Shareholders: (%)
because: (1) It managed to stock up scrap inventory at low prices (when Ann Joo Corp S/B 66.6
prices weakened on seasonal factors in 4Q); and (2) The demand in the
SEA region has started to pick up since Jan 09.
♦ 3 sen final dividend. AJR declared a final gross dividend per share FYE Jun 2010f 2011f 2012f
(GDPS) of 3.0 sen, bringing FY12/09 total GDPS of 6.0 sen and total EPS chg (%) - - -
Var to Cons (%) +5.8 +11.5 -
dividend payout ratio of 95%. Post FY12/09, AJR will resume to its
dividend payout ratio of at least 60%. We are raising our GDPS forecasts PE Band Chart
for FY12/10-11 from 12-15 sen to 24-27 sen, translating to an annual
gross yield of 8.6-9.6%.
♦ Medium-term demand and price outlook remains firm. Over the
PER = 15x
PER = 10x
medium term, AJR remains upbeat on the outlook for both demand and PER = 5x

price of long steel products in the region, as China (the largest steel
producer and consumer) will remain a net importer for long steel products.
China aside, AJR feels that the commencement of massive pump-priming
activities in other parts of the world as well as the urbanisation and
industrialisation of emerging markets and developing countries will also Relative Performance To FBM KLCI

drive long steel product consumption.

♦ To expand trading division. AJR plans to grow the sales volume at its
trading division (which is one of the leading stockists for high grade
Ann Joo Resources
engineering products in the country) by 50% in FY12/10.
♦ Risks. The risks include: (1) Oversupply in China that results in dumping FBM KLCI

activities by Chinese steel producers in the international market; (2) Steep

contraction in global steel consumption that will weigh down on
international steel prices; (3) Steel rise in energy costs; and (4) Longer-
than-expected gestation period for its mini blast furnace.
♦ Forecasts. Unchanged.
♦ Investment case. Indicative fair value is RM3.53 based on 12x FY12/10 Chye Wen Fei
(603) 9280 2172
fully-diluted EPS of 29.4 sen, in line with our 1-year forward target PER of
chye.wen.fei@rhb.com.my
12x for the long steel product sector. Maintain Outperform.

Please read important disclosures at the end of this report. Page 1 of 5

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 1 March 2010

FY12/09 Results
♦ Below expectations. FY12/09 net profit of RM31.6m came in below our as well as market expectations,
accounting for only 50.8-51.2% of our forecast and the market consensus. The variance against our forecast
came largely from lower-than-expected sales volumes (AJR pulled back from the export market in 4Q on the
back of seasonally weak selling prices).
♦ YoY. FY12/09 net profit fell 77.3% to RM31.6m due mainly to: (1) Lower average selling prices; (2) Hefty
overhead incurred during the plant shutdown for upgrading works in 1QFY12/09; (3) The cessation of earnings
contribution from its oil palm estate (which was sold in Jun 08).
♦ QoQ. 4QFY12/09 net profit declined by 49.8% to RM22.8m from RM45.5m in 3QFY12/09 mainly due to: (1)
Lower export volumes; and (2) Lower average selling price (as steel prices were seasonally lower in 4Q).

♦ 3 sen final dividend. AJR declared a final gross dividend per share (GDPS) of 3.0 sen, bringing FY12/09 total
GDPS of 6.0 sen and total dividend payout ratio of 95%. Post FY12/09, AJR will resume to its dividend payout
ratio of at least 60% (which was discontinued in FY12/08 on the back of a sharp deterioration in global steel
prices). We are raising our GDPS forecasts for FY12/10-11 from 12-15 sen to 24-27 sen (that is in line with its
targeted dividend payout of minimum 60%), translating to an annual gross yield of 8.6-9.6%.

Briefing Highlights

♦ Anticipating margin boost in 1HFY12/10. AJR anticipates profit margins to accelerate in 1HFY12/10 on the
back of the recent rise in global steel prices (which will likely to sustain, if not rising further on the back of the
cost push factor), which outpace its production cost. This is mainly because:

1. It managed to stock up scrap inventory at low prices (when prices weakened on seasonal factors in 4Q); and

2. The demand in the Southeast Asia (SEA) region has started to pick up since Jan 09.

♦ Nevertheless, AJR expects long steel product prices to experience some minor price corrections in 2HFY12/10
as: (1) Finished steel consumption in some markets is still weak to be inelastic the rising costs; (2) Restocking
activities are slowing; and (3) Concerns on overcapacity will persist as many markets still have idle capacity.

♦ Medium-term demand and price outlook remains firm. Over the medium term, AJR remains upbeat on the
outlook for both demand and price of long steel products in the region, as China (the largest steel producer and
consumer) will remain a net importer for long steel products. This is mainly due to the Chinese government’s
continued efforts to eliminate excessive and obsolete steel capacity (which largely produces long steel products)
as well as the US$586bn stimulus plan that will continue to sustain (if not boosting further) the demand for long
steel products over the next two years. China aside, AJR feels that the commencement of massive pump-priming
activities in other parts of the world as well as the urbanisation and industrialisation of emerging markets and
developing countries will also drive long steel product consumption.

Table 2: Chinese Steel Trade in 2008-2009

(‘000 tonnes) 2008 2009 Change (%)
Exports
- Semis 1,319 44 -97
- Long products 16,163 4,084 -75
- Flat products 28,800 11,843 -59
- Tubes 9,908 5,701 -42
- Total 56,190 21,672 -61
Imports
- Semis 280 4,649 >100
- Long products 1,318 1,457 +11
- Flat products 12,733 15,275 +20
- Tubes 1,060 625 -41
- Total 15,391 22,006 +43
Source: ISSB

♦ To expand trading division. AJR plans to grow the sales volume at its trading division (which is one of the
leading stockists for high-grade engineering products in the country) by 50% in FY12/10, as:

1. It believes the current high crude oil and crude palm oil (CPO) prices will boost demand from its customers,
which are mainly in the oil & gas and palm oil processing industries; and

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 1 March 2010

2. It feels that it is able to capture market shares from certain players who are om difficulty following the
global economic downturn.

♦ Domestic market aside, AJR also plans to expand its market reach in the region by leveraging on its existing
marketing network in the Southeast Asia region. AJR noted that the intense competition for high-grade
engineering steel products may bring down its overall margin in this division, but this is likely to be offset by
higher trading volumes that will in turn increase its absolute profits.

Earnings Forecast

♦ Earnings forecast. Maintained

Risks

♦ Risks to our view. The risks include: (1) Oversupply in China that results in dumping activities by Chinese steel
producers in the international market; (2) Steep contraction in global steel consumption that will weigh down on
international steel prices; (3) Steel rise in energy costs; and (4) Longer-than-expected gestation period for its
mini blast furnace.

Valuation & Recommendation

♦ Investment case. Indicative fair value is RM3.53 based on 12x FY12/10 fully-diluted EPS of 29.4 sen, in line
with our 1-year forward target PER of 12x for the long steel product sector. Maintain Outperform.

Table 3: Earnings Review (YoY)

FYE Dec 2008 2009 % YoY Observations/Comments
(RMm) 12M 12M Chg
Turnover 2,222.1 1,303.0 -41.4 Due to lower average selling prices and sales volumes.
Operating profit 130.1 60.1 -53.8 Hit by margin squeeze arising from: (1) Lower average selling
prices; and (2) Overhead expenses incurred during plant
shutdown in 1Q.
Finance costs -25.2 -24.0 -4.7 Net debt reduced to RM861.4m from RM996.8m a year ago.
Associate 0.2 0.3 80.0
Pretax profit 105.1 36.3 -65.4 Filtered down from operating profit.
Taxation 29.3 -5.5 NM
Minority interests -9.4 0.8 NM
Profit from asset held for sale 14.4 0.0 NM
Net profit 139.4 31.6 -77.3 Dragged further by: (1) The absence of contribution from
plantation business, which was disposed in 2QFY12/08; and (2)
Tax expense.
EPS (sen) 27.4 6.3 -77.3

Operating margin (%) 5.9 4.6 -1.2 pts

Pretax margin (%) 4.7 2.8 -1.9 pts
Net margin (%) 6.3 2.4 -3.8 pts
Effective tax rate -27.8 15.2 43.1 pts

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Table 4: Earnings Review (QoQ)

FYE Dec 2009 2009 2009 2009 % QoQ Observations/Comments
(RMm) 1Q 2Q 3Q 4Q Chg
Turnover 220.1 424.3 382.2 276.4 -27.7 Due to: (1) Lower export volumes; and
(2) Lower average selling price.
Operating profit -32.9 9.1 53.6 30.2 -43.6 Hit by lower average selling price.
Finance costs -8.2 -6.6 -4.8 -4.4 -9.5 Due to lower cost of financing.
Associate 0.0 0.1 0.1 0.1 12.5
Pretax profit -41.1 2.7 48.9 25.9 -46.9 Filtered down from operating profit.
Taxation 1.2 -0.9 -3.2 -2.6 -20.6
Profit from asset held for sale 0.0 0.0 0.0 0.0 NM
Minority interests 1.1 0.5 -0.2 -0.6 >100
Net profit -38.9 2.2 45.5 22.8 -49.8 Filtered down from pretax profit.
EPS (sen) -7.7 0.4 9.0 4.5 -49.8

Operating margin (%) -15.0 2.2 14.0 10.9 -3.1 pts

Pretax margin (%) -18.7 0.6 12.8 9.4 -3.4 pts
Net margin (%) -17.7 0.5 11.9 8.2 -3.6 pts
Effective tax rate (%) 2.9 34.2 6.6 9.9 3.3 pts

Table 5: Earnings Forecasts Table 6: Forecast Assumptions

FYE Dec (RMm) FY08A FY09A FY10F FY11F FYE Dec FY10F FY11F

Turnover 2,222.1 1,303.0 2,301.0 2,496.3

Capacity (‘000 tonnes p.a.)
Turnover growth (%) 14.1 -41.4 76.6 8.5 Hot Metal 500 500
Billets 1,100 1,100
EBITDA 189.0 112.9 363.2 403.2 Bars 630 630
EBITDA margin (%) 8.5 8.7 15.8 16.2
Production Volume (‘000 tonnes)
Depreciation -45.1 -52.5 -50.7 -49.0 Hot Metal 300 500
Net Interest -25.2 -24.0 -58.6 -69.2 Billets 900 1,000
Bars 530 530
Pretax Profit 118.8 36.3 253.9 284.9
Source: Company data, RHBRI estimates
Tax 29.8 -5.5 -38.1 -42.7
Minorities -9.4 0.8 -6.3 -7.1
Net Profit 139.2 31.6 209.4 235.0

Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES

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The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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