Thursday, September 17, 2009
Why I Like Ann Joo Resources - Not All Steel Stocks Are The Same
I am getting a bit scared to post up which stocks I like because the SC and Bursa will think I am manipulating or worse, in collusion with syndicates to push up stock prices. I have stated categorically I do not have any links to any syndicates. I guess because the market is hot, investors will tend to react more knee jerk fashion to anything thats in popular finance blogs.
But seriously, if I was in a syndicate, where got so much time and capital to play/move so many stocks? I think there were more than 10 stocks over the last 3 months alone, you think I control every big syndicate or stockist in town aahh?!
Anyways, I will continue to put up stocks I like as the market is active, its a waste not to highlight good stocks that should trade at higher prices. At least people when they follow this blog are buying things with decent fundamentals - you look at the top volume stocks, you cannot find any research report on half of them, what are the buying based on???
Somebody alerted me to the extension of LRT and its impact on the construction industry, and when you put together the local government and regional governments stimulus packages, steel is looking pretty good. However not all steel makers are alike, some you can just throw out the window because they only make for their own Group's consumption.
Following the torrid downturn in 3Q 2008 the 1Q 2009 has been a working down of inventory levels as prices plunged. We have seen spurts of recovery in 2Q 2009 but not convincing. The key is that a lot of the stimulus packages announced by most governments have not kicked in into the real economy. Hence monitoring how China is performing and impacting the steel prices will give very good indication of what's to come.
1) China’s steel prices had been on the uptrend for 15 weeks before a correction in early August 2009. In August domestic re-bar prices in China have eased 24% to 3,560 yuan/tonne from a year-high of 4,674 yuan/tonne due to a surge in inventory in the near-term. However, the price correction will likely be temporary as Chinese steel consumption should accelerate by 4Q09 as piling works for bulk of project’s allocated under China’s massive 4 yuan trillion stimulus are expected to takeoff soon.
2) China has turned into a net importer of steel at 2.7 million tonne in 1H 2009 versus a surplus of 16.7 million tonne a year ago. Looking around the region for indicators, Taiwan’s largest steel mill, China Steel Corporation, also raised its Average Selling Prices (ASP) on average by NT$1,720 per tonne, or 9% higher, for October and November 2009 delivery - a good leading indicator.
3) Among the local steel players, Ann Joo Resources stands out like a good sore thumb, its ahead of the pack. Despite being in a capital intensive and cyclical industry, Ann Joo has managed to add value, create a more varied platform, and instilling certain competitive advantages to its business model. Cumulative quarterly losses of local steel players have narrowed substantially to RM99mil in 2Q09 against RM429mil in 1Q09 and RM682mil in 4Q08. These drastic improvements largely came on the back of higher volume/selling prices of steel products, stabilising input cost and the notable absence of inventory write-downs. Ann Joo Resources even managed to record a small profit of RM2mil in 2Q09 against a loss of RM39mil in the preceding quarter. Meanwhile, the other four, i.e. Kinsteel Bhd, Malaysia Steel Works Bhd, Lion Industries Bhd and Southern Steel Bhd, still made losses albeit narrower.
4) Regionally there are encouraging trends of a sustained uptrend in regional steel prices - largely triggered by a re-acceleration of infrastructure works in key markets such as Vietnam, Indonesia, Abu Dhabi and the Indian subcontinent. Latest locked-in orders for billet exports by Malaysian millers have surged as high as US$515/tonne against its three-year low of US$342/tonne in November 2008. Selling prices have stabilised around the RM2000/tonne-RM2,100/tonne level.
5) Recent round of price cuts in June lasted only two weeks, suggesting that the worse is over as demand/supply dynamics gradually improve. Domestic steel prices may reachRM3,000-3,200/tonne by 2010 due to a resurgence in local steel demand amid potential supply squeeze.
6) Ann Joo to me is worth at least RM3.00 based on a based on a target PE of 8.5x for 2010 earnings. Ann Joo is an excellent proxy to rising steel prices with additional capacity kicker coming from its new blast furnace due for commissioning in April 2010 . Ann Joo should not be compared to other local players as that would always put the company at a premium. It should be at a premium because its a regional player and its business model ranks on par with top regional players. However, Ann Joo trades at a very steep 55% discount relative to its regional peers. You cannot take any other local player and compare with regional players because their business model and reach are well below Ann Joo's expertise and reach.
7) Ann Joo’s valuations now is under appreciated as its efficiency and export-orientated growth strategy are not fully accounted for. That's why its the first to get back to profitability. Export-orientated steel millers such as Ann Joo (which derive 50% of total sales volume from exports) are benefiting from improved regional billet prices, which have breached the USD500/t mark (vs USD470/t a month ago). Only Ann Joo has such a high export ratio, the rest are less than 30%. To be able to export will give Ann Joo a leg up on recovery in billet prices as the first signs of recovery in prices will be in regional prices - hint, look at Taiwan's forward contracts.
8) Ann Joo has established business relationships with internationally renowned suppliers from Japan and Korea, such as Nippon Steel, Posco, Sumitomo and JFE. It also is one of the two steel players in Malaysia with the UK Certification Authority for Reinforcing Steels (CARES)’s certificate of approval. CARES is an independent, not-for-profit body that offers certification schemes to provide confidence to product users that CARES approved companies comply with the relevant product standards.
9) Ann Joo’s blast furnace (BF) expansion remains on track to start operations in 2Q10. The BF has reached more than 70% completion and the erection and installation work is currently being carried out. The company plans to kick-start its cold commissioning in April 2010 and targets full commissioning of the plant by June 2010. Ann Joo’s upstream expansion into BF will not only reduce its dependence on scrap metal but will also reduce the group’s total energy costs. The group targets an optimal raw material input of 60% scrap and 40% molten iron.
10) Why RM3.00 ... it has a 3 year EPS CAGR of 18%. Ann Joo 522.7m shares Market cap RM1.2bn
p/s photo: Alan Dawa Doma