The going remains tough
Domestic demand for steel products should remain buoyant in 2014, but macro risks, forex losses and the threat of imports are likely to continue to weigh on Ann Joo's prospects. New policies to curb dumping from China could help, but that has yet to materialise.
Our target price falls as we apply a lower CY15 target P/E of 8.6x (11.1x earlier), pegged to a 40% discount to its 10-year historical average. Dumping is likely to continue and the persisting global concerns may curtail its exports. The recent electricity tariff hike presents medium-term cost risks. Under our new rating structure, our call changes to Hold from Neutral. We recommend a switch to contractors.
Domestic demand backed by construction activities
The domestic demand for steel products should continue to be buoyant going into 2014. This will be supported by the pick-up in construction activities in infrastructure and building sectors. The implementation of rail projects such as the MRT SBK line and new MRT 2 under the Economic Transformation Programme (ETP) should also help demand.
Dumping from China
The dumping of steel wire rods by China's major producers continued in Sep 13 and is likely to sustain into 2014 as China's steel players take advantage of the 9% export rebate and the absence of domestic policies that could catalyse China‘s domestic steel demand. This, in turn poses price distortion risks for steel wire rods in Malaysia. The prices of local steel wire rods, which historically trade at a premium over that of steel bars, are still at a 5-10% discount to steel bars. There has yet to be any additional government intervention to address this issue. Also, some local players have been importing steel products to take advantage of the lower prices. The declining domestic revenue should be partially offset by Ann Joo's strategy to shift to the export market, but the volatility in RM/US$ may result in additional forex losses. Ann Joo's export sales form around 20-30% of its production volume.
Cost risks have emerged
Cost risks have emerged following the recent 16.85% average increase in industrial power tariffs. Electricity constitutes 8-12% of its production costs. Every 10% hike in the power tariff would cut its EPS by 9-10%. The cost advantage lies in the ability to switch to its blast furnace facility.
Publish date: 10/12/13