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Maintain neutral: We are “neutral” on both the steel and cement sectors as the positive impact of better demand is generally neutralised by higher costs. The performance of steel players under our coverage in financial year 2013 (FY13) was decent with Ann Joo Resources Bhd (target price [TP]: RM1.31) exceeding consensus estimates by 38% with core earnings of RM36.5 million.
Malaysia Steel Works (KL) Bhd (Masteel) (TP: RM1.14) results were broadly within expectations with RM28.8 million core earnings or 91% of consensus’ estimate of RM31.6 million. Ann Joo’s better than expected performance was mainly due to improved sales performance in both the domestic and international markets despite weak prices, and improvements in operational efficiency.
As for cement players, we added Lafarge Malaysia Bhd (“market perform”; TP: RM9.50) to our coverage in the first quarter of 2014. Its FY13 core net profit was RM387.5 million or 106% of consensus’ forecast of RM364.3 million.
We expect domestic demand in the near term to remain strong on incoming 10th Malaysia Plan and Economic Transformation Programme projects.
We are “neutral” on both the steel and cement sectors’ outlook for the year 2014 as the positive impact of better construction demand is generally offset by higher costs. While we believe that the hike in electricity tariffs will impact the steel industry more than the cement industry due to higher usage of electricity in the steel sector, Ann Joo is well positioned to absorb the impact.
From a valuation standpoint, the steel sector valuation seems to have bottomed out at roughly 0.5 times price-to-book value (P/BV) (Ann Joo at 0.51 times and Masteel at 0.39 times). Among the two, we prefer Ann Joo due to its limited downside and better earnings growth potential in 2014. Note that Ann Joo’s current valuation is close to negative 1.5 standard deviation below its mean P/BV. Masteel’s current valuation is close to its mean P/BV of 0.41 times.
However, compelling valuation prompts us to upgrade Ann Joo to “outperform” (from “market perform”) with an unchanged TP of RM1.31. We believe the selldown on Ann Joo has been excessive as its share price has slumped 67% from its peak of RM3.35 in January 2010.
We are also upgrading Masteel to “market perform” (from underperform) with unchanged TP of RM1.14 as the recent share price decline has made its valuation more attractive at 0.39 times P/BV. The company is also expected to expand its capacity progressively in the next two years, although we believe that near term earnings impact is limited. — Kenanga Research, April 4
This article first appeared in The Edge Financial Daily, on April 7, 2014.
