Ann Joo Resources is seen as a key beneficiary of rising steel prices premised on its improving costeffectiveness in producing iron.
ANNJOO (6556) ANN JOO RESOURCES - Earnings up-cycle seen for steel companies
PETALING JAYA: Local steel players are seeing a turnaround in their fortunes thanks to a recovery in steel prices.
After several years in the doldrums, steel producers are at the early stage of an earnings up-cycle going by the recently concluded results season and are expected to register better earnings in 2017.
KAF Investment Bank noted that after a seasonally slower third quarter, steel prices have resumed their upward march since October on cost-push factors.
“Notably, Chinese coking coal prices have surged around 192% year-to-date (y-t-d) after the Chinese government stepped-up capacity cuts for the coal and steel industries
ANNJOO (6556) ANN JOO RESOURCES - Earnings up-cycle seen for steel companies
PETALING JAYA: Local steel players are seeing a turnaround in their fortunes thanks to a recovery in steel prices.
After several years in the doldrums, steel producers are at the early stage of an earnings up-cycle going by the recently concluded results season and are expected to register better earnings in 2017.
KAF Investment Bank noted that after a seasonally slower third quarter, steel prices have resumed their upward march since October on cost-push factors.
“Notably, Chinese coking coal prices have surged around 192% year-to-date (y-t-d) after the Chinese government stepped-up capacity cuts for the coal and steel industries
.“On the other hand, the sentiment-driven rally in iron ore prices (US$72/tonne in November) should normalise in the coming months once demand from Chinese mills start slowing down, and excess capacity eases. Along with improving domestic demand, we expect the steel price recovery to continue in 2017 off a smoother base,” the niche investment bank said in its strategy report for 2017.Other positive catalysts for the domestic steel industry was the provisional safeguard duties on imported steel bars and wire rods at a rate of 13.9% and 13.4% effective since Sept 26, while the recent closure of ailing steel miller Megasteel Sdn Bhd is a boon for other players like Southern Steel Bhd and Mycron Steel Bhd.
KAF said based on recent channel checks, steel millers were receiving more enquiries from local contractors looking to lock-in their steel requirements following China’s planned capacity cuts of 150 million tonnes by 2020 from the 45 million tonnes forecast this year.
In terms of jobs, a number of infrastructure projects under the 11th Malaysia Plan will move from the planning to implementation stage next year, boding well for buildings materials companies like steel.
Kenanga Research noted that local steel rebar prices trading at the range of between RM1,700 and RM1,850/tonne as at end-September as opposed to the lows of RM1,450/tonne in financial year (FY) 2015 due to China exporting steel rebars at extremely low prices, causing local steel players to register losses.
Ann Joo Resources is seen as a key
beneficiary of rising steel prices premised on its improving cost
effectiveness in producing iron.
It noted that in anticipation of the safeguard measures by local importers, large quantities of steel were imported in June and July this year, surging 11% and 44% year-on-year, respectively.“However, post implementation of the measures, we expect the imports for Chinese steel to taper down going forward.
“Hence, we believe local steel prices will see more stability and potentially higher prices in the fourth quarter and local steel prices to see significant improvements in pricing from FY17 when these large quantities of Chinese steel imports depletes.
“We believe our average FY17 estimate average selling price assumption of RM1,890/tonnes remains sustainable with the reduction of imports from China,” the research house said in a recent report.
Of the listed steel stocks, Ann Joo Resources Bhd is seen as a key beneficiary of rising steel prices premised on its improving cost effectiveness in producing iron through its blast furnace-EAF hybrid technology whereas other peers in the local market are only using EAF (see chart).
Additionally, all finished steel products manufactured by the company are long products like wire rod and rebars, which are entitled under the safeguard.
On the other hand, Southern Steel Bhd produces long and flat products. Flat products are not entitled for the safeguard.
KAF estimated that for every RM100/tonne increase in bar prices, Ann Joo’s net profit would rise by 18% to 23%.
For the third quarter ended Sept 30, 2016, Ann Joo Resources swung back into profitability with a net profit of RM22.9mil compared with a net loss of RM82.3mil in the same quarter a year ago.
Southern Steel also returned to the black with a net profit of RM19.3mil in the first quarter ended Sept 30, 2016, against a net loss of RM51.9 recorded in the same period previously. The company said the return to profitability was due to higher selling price and lower cost.
Similarly, Malaysia Steel Works (KL) Bhd reversed its loses, albeit a small profit of RM1.2mil in its third quarter ended end-September compared with a RM24.1mil net loss in the same quarter a year ago.
Mycron Steel Bhd, it saw profits jump from RM2.83mil to RM10.1mil, while Lion Industries Corp Bhd narrowed its net loses to RM2.5mil in the first quarter ended Sept 30 from losses of RM16.4mil previously.
The recovery in steel prices has brought back shine to steel stocks on Bursa Malaysia dispelling the gloom plaguing them in recent years.
Shares of Ann Joo Resources and Mycron Steel have risen more than 200% y-t-d.
Malaysia Steel Works closed last Friday higher by 70%, while Lion Industries was up close to one-third from the start of the year.
Despite its strong share price run to RM2.05 as of last Friday, KAF said that Ann Joo Resources “still trades at alluring FY17-FY19 forecast price earnings of seven to eight times versus a robust earnings per share compound annual growth rate of 31%.”
Following the prepayment of the final tranche of its bonds (RM105mil) in May, net gearing is projected to improve to 58% by FY18F versus 86% as at Sept 30, it noted.
Meanwhile, Perwaja Holdings Bhd, which was badly hit by the cheap imports from Chinese steel, is currently placed under PN17 status. The company is waiting for its white knight from China, Tianjin Zhiyuan Investment Group Ltd to initiate a rescue plan soon.
Another factor that may generate interest in the RM41bil domestic steel industry is merger and acquisition (M&A). It was reported that the Federal Government was supportive of any consolidation moves by the local steel players. Malaysia Steel Institute estimated that the consolidation to be undertaken in three phases over a five-year period, could pave the way for a reduction in the number of upstream and upper-mid stream steel players to 25 from 40 currently.
As competition gets keener, analysts do not discount more local steel millers exploring M&A opportunities or strategic tie-ups with foreign players for long-term survival.
Globally, the Chinese government is also targetting more mergers to drive its aim of having its Top 10 millers producing 60% of the country’s steel output.
Steel players to see improve earnings in 2017
ANNJOO (6556) ANN JOO RESOURCES - Earnings up-cycle seen for steel companies
http://www.thestar.com.my/business/business-news/2016/12/12/earnings-up-cycle-seen-for-steel-companies/
