PP 7767/09/2011(028730)

8 October 2010
RHB Research
Corporate Highlights
Malaysia
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

V is it Note
8 October 2010
MARKET DATELINE

Ann Joo Resources Share Price

Fair Value
:
:
RM2.82
RM3.14
Mini Blast Furnace Plant to Start Operation Soon Recom : Market Perform
(Maintained)

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

Net Core Net

FYE Turnover profit EPS EPS Growth PER C.EPS P/NTA Gearing ROE GDY

Dec (RMm) (RMm) (sen) (sen) (%) (x) (sen) (x) (x) (%) (%)
2009 1,303.0 31.6 6.3 6.3 -77.0 44.8 - 1.3 1.0 3.5 2.1
2010f 2,177.3 171.5 32.8 32.8 >100 8.6 34.4 1.1 1.0 13.2 4.3
2011f 2,777.0 203.4 38.9 38.9 18.6 7.2 40.6 1.0 1.1 14.3 5.3
2012f 2,859.2 214.7 41.1 41.1 5.6 6.9 49.4 1.0 0.9 13.9 6.4
Main Market Listing / Non-Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ Mini blast furnace to be fully operational by end-Nov/Dec 2010. Issued Capital (m shares) 522.7
Market Cap (RMm) 1,474.0
AJR’s mini blast furnace is expected to commence its full operation by
Daily Trading Vol (m shs) 0.3
end-Nov/Dec 2010 after going through cold commissioning currently. To
52wk Price Range (RM) 2.23 – 3.35
recap, its mini blast furnace was originally targeted to be completed by Major Shareholders: (%)
Dec 2008, but was subsequently delayed due to the downturn in the Ann Joo Corporation S/B 62.2
global economy. In addition, the initial plan to invest into a slabs rolling Lembaga Tabung Haji 5.1
mill to produce high-grade engineering steel products has also been
shelved.
FYE Dec FY10 FY11 FY12
♦ Strategic procurement of raw materials. AJR said that the average EPS chg (%) -2.6 -0.5 2.2
Var to Cons (%) -4.7 -4.1 -16.9
cost of its current inventory of scraps is below US$400/tonne and is
sufficient to last them till Feb 2011. So far, AJR has secured roughly 60k PE Band Chart
tonnes of iron fines domestically and has imported about 50k tonnes of
coking coal from Russian and Indian sources.
PER = 15x
PER = 10x
♦ Anticipating weak 3QFY12/10 results. Indications from AJR are PER = 5x

pointing towards weak 3QFY12/10 results due to a lower sales volume.

We understand that sales volumes for Aug and Sep 2010 were the lowest
so far this year, as both export and domestic tonnages declined. Domestic
tonnages were low as contractors adopted a wait-and-see approach due
to the uncertain price outlook for steel.
Relative Performance To FBM KLCI
♦ Risks. 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 Ann Joo Resources

international steel prices; (3) Steep rise in energy costs; and (4) Longer-
than-expected gestation period for its mini blast furnace. FBM KLCI

♦ Earnings Forecasts. We have tweaked our FY12/10-12 earning forecasts

by -2.6%, -0.5%, and +2.2%, having: 1) Updated our RM/US$ exchange
rate assumptions for FY12/10-12; 2) Reduced operational days assumed
in FY12/10 for AJR’s mini blast furnace plant; and 3) Raised the
production volumes for its steel billets in FY12/11-12.

♦ Investment case. Indicative fair value for AJR is revised slightly to

RM3.14 (from RM3.16 previously) based on 10x revised FY12/11 fully-
diluted EPS of 31.4 sen. We maintain our Market Perform
Joshua CY Ng
recommendation on the stock.
(603) 92802158
joshuang@rhb.com.my

Please read important disclosures at the end of this report.

A comprehensive range of market research reports by award-winning economists and analysts are exclusively Page 1 of 4
available for download from www.rhbinvest.com
 8 October 2010

Company Visit – Key Takeaways

♦ Highlights. Key takeaways from our recent visit to Ann Joo Resources (AJR) are:

1. AJR has started the cold commissioning of its mini blast furnace plant. Full commissioning is expected in Nov
or Dec 2010;

2. AJR has secured scrap supplies below US$400/tonne, which can last them till Feb 2011. Iron ore
requirements for its mini blast furnace plant will be sourced domestically, while coking coal requirements will
be imported; and

3. Indications from AJR are pointing towards a weak 3QFY12/10 due to a lower-than-expected sales volume.
Nevertheless, AJR expects domestic as well as export sales to pick up from 4QFY12/10.

♦ Mini blast furnace to be fully operational by end-Nov/Dec 2010. AJR’s mini blast furnace is expected to
commence its full operation by end-Nov/Dec 2010 after going through cold commissioning currently. To recap, its
mini blast furnace was originally targeted to be completed by Dec 2008, but was subsequently delayed due to the
downturn in global economy. In addition, the initial plan to invest into a slabs rolling mill to produce high-grade
engineering steel products has also been shelved. Currently, the mini blast furnace will be operated to produce
hot metal, which can be used as feedstock (apart from scrap) to produce billets in AJR’s electric arc furnace. The
benefits of using hot metal together with scrap as feedstock include:

1. Melting time is shortened, hence resulting in lower energy cost. Tap-to-tap time is also shorter, thus more
cycles can be run and hence, output is higher.

2. Billets produced will be of higher quality and hence, can be fed into the production of higher-quality
downstream steel products that command higher margins.

♦ Strategic procurement of raw materials. AJR said that the average cost of its current inventory of scraps is
below US$400/tonne and is sufficient to last them till Feb 2011. We note that the current scrap price in the spot
market (HMS 1 & 2) is about US$408/tonne. Other than that, AJR has also managed to secure some of its raw
material requirements for the mini blast furnace plant (i.e. iron ore fines and coking coal). So far, AJR has
secured roughly 60k tonnes of iron fines domestically (9% of its estimated annual requirement) at a price of less
than US$120/tonne, and imported about 50k tonnes of coking coal (25% of its estimated annual requirement)
from Russian and Indian sources. AJR said that its purchase of iron ore fines will be made on a spot basis rather
than on contract basis, and purchase price from domestic sources will be cheaper by 5-10% than international
price due to savings in freight costs and middleman charges.

♦ Anticipating weak 3QFY12/10 results. Indications from AJR are pointing towards weak 3QFY12/10 results
due to a lower sales volume. We understand that sales volumes for Aug and Sep 2010 were the lowest so far this
year, as both export and domestic tonnages declined. Domestic tonnages were low as contractors adopted a wait-
and-see approach due to the uncertain price outlook for steel. Nevertheless, AJR’s results are expected to fare
better from 4QFY12/10 onwards on an anticipated pick-up in export tonnages and domestic long steel demand
underpinned by the implementation of 10MP projects.

Earnings Forecasts

♦ Earnings forecasts. We have tweaked our FY12/10-12 earning forecasts by -2.6%, -0.5%, and +2.2%, having:
(1) Updated our RM/US$ exchange rate assumptions FY12/10-12; (2) Reduced operational days assumed in
FY12/10 for AJR’s mini blast furnace projects (from 45 days to 15 days); and (3) Raised the production volumes
for its steel billets in FY12/11-12.

Risks

♦ Risks. 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.

A comprehensive range of market research reports by award-winning economists and analysts are exclusively Page 2 of 4
available for download from www.rhbinvest.com
 8 October 2010

Valuation & Recommendation

♦ Investment case. We think that it is pre-mature to turn bullish on the steel sub-sector due to:

1. The risk of a sharper-than-expected slowdown in the global economy remains, and this may once again hurt
the buying sentiment on steel products; and

2. Overcapacity (particularly in China) remains a key issue over the medium to long term, despite the recent
plants closure as the excess capacity in China’s steel sector is still high. It will take a while before the impact
from the Chinese government’s efforts to consolidate the highly fragmented steel sector in the country can be
felt.

♦ Our indicative fair value for AJR is trimmed slightly to RM3.14 (from RM3.16 previously) based on 10x revised
FY12/11 fully-diluted EPS of 31.4 sen. We maintain our Market Perform recommendation on the stock.

Table 2: Earnings Forecasts Table 3: Forecast Assumptions

FYE Dec (RMm) FY09A FY10F FY11F FY12F FY10F FY11F FY12F

Turnover 1,303.0 2,177.3 2,777.0 2,859.2 Capacity (‘000 tonnes p.a.)

Turnover growth (%) -41.4 67.1 27.5 3.0 Hot Metal 500 500 500
Steel Billets 1,100 1,100 1,100
EBITDA 112.9 315.5 368.7 381.9 Steel Bars 630 630 630
EBITDA margin (%) 8.7 14.5 13.3 13.4
Production Volume (‘000 tonnes p.a.)
Depreciation -52.5 -50.7 -49.0 -47.4 Hot Metal 22 500 500
Net Interest -24.0 -56.9 -73.1 -74.2 Steel Billets 900 945 980
Steel Bars 575 600 600
Pretax Profit 36.3 207.9 246.5 260.2
Tax -5.5 -31.2 -37.0 -39.0
Minorities 0.8 -5.2 -6.2 -6.5
Net Profit 31.6 171.5 203.4 214.7
Source: Company data, RHBRI estimates

Chart 1: AnnJoo Technical View Point

♦ AnnJoo’s share price halted its previous uptrend
after touching a high of RM3.35 in Jan 2010.

♦ It then sustained at a sideways trading within the

range of RM2.70 – RM2.98 until it plunged to below
the RM2.70 level in May.

♦ The fall dragged the stock to a multi-month low of

RM2.23 in Jun, before another round of technical
rebound took place.

♦ It confirmed the rebound in Jul, when the 10-day

SMA cut to above the 40-day SMA near RM2.40.

♦ It regained the RM2.70 level in Sep, prior to the

testing of a high at RM2.97 in recent trading.

♦ But, due to the profit-taking activities, the stock

ended slightly below the 10-day SMA of RM2.82
yesterday.

♦ Technically, the momentum readings have turned

mixed, and the chart layout is pointing to a further
retreat in its share price in the near term.

♦ However, if it can still sustain at above the 40-day

SMA of RM2.67 near the RM2.70 level, its uptrend
will remain steady. The stock still has a chance to
penetrate the overhead hurdle at RM2.98 upon the
resumption of buying momentum, in our view.

A comprehensive range of market research reports by award-winning economists and analysts are exclusively Page 3 of 4
available for download from www.rhbinvest.com
 8 October 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
strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts
any liability for any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB
Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity
securities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other
services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

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
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the 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 KLCI benchmark (+/- five percentage points) over the next 6-12 months.

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

Industry/Sector Ratings

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

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

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

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended
securities, subject to the duties of confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the
actions of third parties in this respect.

A comprehensive range of market research reports by award-winning economists and analysts are exclusively Page 4 of 4
available for download from www.rhbinvest.com