29 April 2010

PP 7767/09/2010(025354)
RHB Research
Malaysia Institute Sdn Bhd
Corporate Highlights A member of the
RHB Banking Group
Company No: 233327 -M

R e su l ts / B r ief ing N o t e 29 April 2010

MARKET DATELINE

Ann Joo Resources Share Price

Fair Value
:
:
RM2.85
RM3.32
Near-Term Outlook Remains Positive Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (ANNJOO; Code: 6556) Bloomberg: AJR MK

Net EPS Net
FYE Turnover Profit EPS Growth # PER # C.EPS* P/NTA gearing ROE GDY
Dec (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%)
2009 1,303.0 31.6 6.3 -77.0 45.3 - 1.4 1.0 3.5 2.1
2010f 2,368.6 194.3 37.2 >100 7.7 31.7 1.3 1.5 16.9 8.4
2011f 3,068.6 217.2 41.5 11.8 6.9 39.1 1.2 1.9 17.8 9.5
2012f 3,093.1 214.9 41.1 -1.0 6.9 47.5 1.2 1.7 16.6 9.5
Main Market Listing / Non-Trustee Stock / Syariah-Approved Stock By The SC # Normalised, ex-forex * Consensus Based On IBES

♦ Below our expectation, but above market consensus. 1QFY12/10 net

RHBRI Vs.
Above
Consensus

profit came in below our expectation, accounting for only 19.2% of our In Line
full-year forecast. We believe the variance against our forecast came Below
largely from higher-than-expected raw material costs (in particular,
scraps). As against the market expectations, the results came in above, Issued Capital (m shares) 522.7
Market Cap(RMm) 1,489.7
accounting for 27.7% of the full-year market consensus.
Daily Trading Vol (m shs) 0.5
♦ Remains upbeat on near-term demand and price outlook. AJR 52wk Price Range (RM) 1.42 – 3.35
remains upbeat on the outlook for both demand and price of long steel Major Shareholders: (%)
products in the region, as: (1) China will remain a net importer for long Ann Joo Corp S/B 66.6
steel products; and (2) Massive pump priming activities worldwide will
continue to boost demand and hence prices of long steel products in the
international market. Nevertheless, AJR expects long steel product prices FYE Dec 2010f 2011f 2012f
to experience some intermitten corrections throughout the year. EPS chg (%) -7.2 -7.6 -2.6

♦ Trading division – a volume game now. AJR feels that margins at the
Var to Cons (%) 17.1 6.3 -13.5

trading division, are likely to remain low (at higher single digit) in the PE Band Chart
medium term. Looking forward, AJR plans to grow the sales volume at its
trading division by at least 50% in FY12/10 (that will in turn increase its PER = 11x
absolute profits). PER = 8x
PER = 5x
♦ Update on mini blast furnace. Despite seeing escalating input prices (in
particular, iron ore fines and coking coke), the mini blast furnace is on
track to commence production by Jun 10, this is mainly because AJR is
hopeful that it is able to source iron ore fines domestically, of which prices
are significantly cheaper relative to the international market.
♦ Risks. The risks include: (1) Oversupply in China that results in dumping Relative Performance To FBM KLCI
activities by Chinese steel producers in the international market; (2) Steep
contraction in global steel consumption that will weigh down on Ann Joo Resources
international steel prices; (3) Steep rise in energy costs; and (4) Longer-
than-expected gestation period for its mini blast furnace.
♦ Forecasts. We are cutting our FY12/10-12 net profit forecasts by 2.6-
FBM KLCI
7.6%, largely to reflect higher raw material costs (in particular, scraps,
iron ore fines, and coking coke) that more than offset higher selling price
assumptions for billets, bars and wire rods.
♦ Investment case. Correspondingly, indicative fair value is downgraded by Chye Wen Fei
5.9% from RM3.53 to RM3.32 based on 12x revised FY12/10 fully-diluted (603) 9280 2172
EPS of 27.6 sen. Maintain Outperform, as valuations remain chye.wen.fei@rhb.com.my
undemanding despite having lowered our net profit forecasts.

Please read important disclosures at the end of this report.

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 29 April 2010

1QFY12/10 Results
♦ Below our expectation, but above market consensus. 1QFY12/10 net profit came in below our expectation,
accounting for only 19.2% of our full-year forecast. We believe the variance against our forecast came largely
from higher-than-expected raw material costs (in particular, scraps). As against the market expectations, the
results came in above, accounting for 27.7% of the full-year market consensus.
♦ YoY. 1QFY12/10 returned to the black with a net profit of RM41.5m due mainly to: (1) Margin expansion arising
from higher production volume and better selling prices; (2) The absence of overhead expenses incurred during
plant shutdown in 1QFY12/09; and (3) Lower finance costs.
♦ QoQ. 1QFY12/10 net profit rose by 81.9% to RM41.5m from RM22.8m in the previous quarter, thanks to: (1)
Higher sales tonnage (both in terms of domestic and exports, and AJR pulled back from the export market in 4Q
in anticipating for better prices in 1Q); and (2) Higher selling prices (4Q is seasonally weaker).

Briefing Highlights

♦ Remains upbeat on near-term demand and price outlook. AJR remains upbeat on the outlook for both
demand and price of long steel products in the region, as:

1. China (the largest steel producer and consumer) will remain a net importer for long steel products,
underpinned by the Chinese government’s ongoing efforts to eliminate excessive and obsolete steel capacity
(which largely produces long steel products) as well as the US$586bn stimulus plan that will continue to
sustain the demand for long steel products; and

2. Massive pump priming activities worldwide will continue to boost demand and hence prices of long steel
products in the international market.

♦ Nevertheless, AJR expects long steel product prices to experience some minor corrections throughout the year,
as: (1) Finished steel consumption in some markets is still weak; and (2) Concerns on overcapacity will persist as
many markets still have idle capacity.

♦ Trading division – a volume game now. AJR feels that margins at the trading division, are likely to remain low
(at high single digit, which is lower compared to a historical average margin of 12-15%) in the medium term, as
prices of flat products (in particular, high-grade engineering products) remain relatively weak on the back of
overcapacity. Looking forward, AJR plans to grow the sales volume at its trading division by at least 50% in
FY12/10 (that will in turn increase its absolute profits), as:

1. It believes that the current high crude oil and crude palm oil (CPO) prices will boost demand from its
customers, which are mainly in the oil & gas and palm oil processing industries; and

2. It feels that it is able to capture market shares from certain players who are facing difficulty following the
global economic downturn.

♦ Update on mini blast furnace. Despite seeing escalating input prices (in particular, iron ore fines and coking
coke), the mini blast furnace is on track to commence production by Jun 10. This is mainly because AJR is hopeful
that it is able to source iron ore fines domestically, of which prices are significantly cheaper relative to the
international market.

Earnings Forecast

♦ Earnings forecast. We are cutting our FY12/10-12 net profit forecasts by 7.2%, 7.6% and 2.6% to RM194.3m,
RM217.2m and RM214.9m respectively, largely to reflect higher raw material costs (in particular, scraps, iron ore
fines, and coking coke) that more than offset higher selling price assumptions for billets, bars and wire rods.

Risks

♦ Risks to our view. The risks include: (1) Oversupply in China that results in dumping activities by Chinese steel
producers in the international market; (2) Steep contraction in global steel consumption that will weigh down on
international steel prices; (3) Steep rise in energy costs; and (4) Longer-than-expected gestation period for its
mini blast furnace.

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 29 April 2010

Valuation & Recommendation

♦ Investment case. Following the downward revision in our earnings forecasts, indicative fair value is downgraded
by 5.9% from RM3.53 to RM3.32 based on 12x revised FY12/10 fully-diluted EPS of 27.6 sen, in line with our 1-
year forward target PER of 12x for the long steel product sector. Maintain Outperform, as valuations remain
undemanding despite having lowered our net profit forecasts.

Table 2: Earnings Review (YoY)

FYE Dec 2009 2010 % YoY Observations/Comments
(RMm)
3M 3M Chg
Turnover 220.1 473.9 >100 Due to: (1) Higher sales volumes; and (2) Higher selling prices.
Operating profit/ (loss) -32.9 50.7 NM Boosted by (1) The absence of inventory writedown; (2) The
absence of overhead expenses incurred during plant shutdown in
1Q09; and (3) Higher selling prices.

Finance costs -8.2 -4.4 -46.7

Net debt reduced to RM779.9m from RM984.5m a year ago.
Associate 0.0 0.1 NM
Pretax profit/ (loss) -41.1 46.4 >100 Boosted further by lower finance costs.
Taxation 1.2 -4.6 NM
Minority interests 1.1 -0.3 NM
Net profit/ (loss) -38.9 41.5 >100 Filtered down from pretax profit.
EPS (sen) -7.7 8.3 >100

Operating margin (%) -15.0 10.7 25.7 pts

Pretax margin (%) -18.7 9.8 28.5 pts
Net margin (%) -17.7 8.8 26.4 pts
Effective tax rate (%) 2.9 9.9 6.9 pts

Table 3: Earnings Review (QoQ)

FYE Dec 2009 2010 % QoQ Observations/Comments
(RMm) 4Q 1Q Chg
Turnover 276.4 473.9 71.5 Due to: (1) Higher selling prices; and (2) Higher sales volumes.
Operating profit 30.2 50.7 67.7 Filtered down from topline.
Finance costs -4.4 -4.4 0.1 Due to higher cost of financing.
Associate 0.1 0.1 -3.7
Pretax profit 25.9 46.4 78.8 Filtered down from operating profit.
Taxation -2.6 -4.6 77.6
Minority interests -0.6 -0.3 -41.6
Net profit 22.8 41.5 81.9 Filtered down from pretax profit.
EPS (sen) 4.5 8.3 81.9
Operating margin (%) 10.9 10.7 -0.2 pt
Pretax margin (%) 9.4 9.8 0.4pt
Net margin (%) 8.2 8.8 0.5 pt
Effective tax rate (%) 9.9 9.9 -0.1 pt

Table 4: Earnings Forecasts Table 5: Forecast Assumptions

FYE Dec (RMm) FY09A FY10F FY11F FY12F FYE Dec FY10F FY11F FY12F
Turnover 1,303.0 2,368.6 3,068.6 3,093.1
Capacity (‘000 tonnes)
Turnover growth (%) -41.4 81.8 29.6 0.8 Hot Metal 500 500 500
Billets 1,100 1,100 1,100
EBITDA 112.9 326.7 372.4 368.2 Bars 630 630 630
EBITDA margin (%) 8.7 13.8 12.1 11.9
Production Volume (‘000 tonnes)
Depreciation -52.5 -50.7 -49.0 -47.4 Hot Metal 86 500 500
Net Interest -24.0 -59.5 -77.1 -77.4 Billets 900 925 950
Bars 575 600 600
Pretax Profit 36.3 216.5 246.3 243.3
Source: Company data, RHBRI estimates
Tax -5.5 -32.5 -36.9 -36.5
Minorities 0.8 -5.4 -6.2 -6.1
Net Profit 31.6 178.6 203.2 200.7

Source: Company data, RHBRI estimates

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 29 April 2010

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The
opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or
be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any
manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons
may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or
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“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
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This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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securities, subject to the duties of confidentiality, will be made available upon request.

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