Mixed views on Ann Joo H2

PETALING JAYA: Analysts are mixed about the second half outlook for steel maker Ann Joo Resources Bhd.

OSK Research said the local steel demand might remain lacklustre due to the slow implementation of government projects but it remained hopeful that export sales would increase.

However, CIMB Research gave a more bullish outlook for the steel maker, citing the upcoming commencement of construction projects.

“Potential re-rating catalysts for Ann Joo include stronger domestic demand in the second half as construction starts to gain momentum,” CIMB said, adding that Ann Joo's gross yield was the highest in the buiding materials sector at 6% to 7%.

OSK said the saving grace for Ann Joo might be in the form of a potential strategic stake sale.

It predicted that Ann Joo's controlling shareholder, the Lim family, might reduce its stake from 67.88% to just over 50% .

The research house also said Ann Joo, as a key trader of steel plates, might sell a 15% stake to its main supplier from Japan.

“We have low expectations for 2H but we think the market may still respond positively to a strategic sale, especially since the current market is short on trading ideas,” OSK reported.

According to OSK, while steel prices may have moved at a slower pace, the cost of raw material namely scrap metal rose sharply early this year, indicating that the profit margins for Ann Joo would remain bleak.Ann Joo posted a net profit of RM75mil for the first half of FY11 ended June 30, which was a 33% drop year-on-year from RM112.4mil.

Its performance was mainly affected by weaker international steel prices, rising costs and a 10% increase in the effective tax rate to 18.5% due to lower export incentives.

CIMB Research deemed the group's net profit to be broadly in line with its expectations although below consensus.

Ann Joo's 2Q net profit slid 54% to RM32.7mil from RM70.9mil a year ago. The drop in profits was attributed to the social unrest in the Middle East disrupting demand and the March 11 earthquake disaster in Japan which had disrupted the supply chain.