Analysts cautious on Ann Joo’s outlook despite JV with Southern Steel

Unless Ann Joo is able to help turn around Southern Steel, 2H20 could be negative if the environment does not pick up

by SULHI KHALID/ pic source:

ANALYSTS remain cautious on steel manufacturer Ann Joo Resources Bhd’s earnings’ outlook despite its proposed joint venture (JV) with Southern Steel Bhd.

Southern Steel has been a loss-making company for the last three financial quarters, with a net loss of RM119 million, Kenanga Investment Bank Bhd (Kenanga IB) wrote in a report yesterday.

“The immediate impact on the second half of 2020 (2H20) could be negative if the environment does not pick up.

“We shall update our forecasts once we get clarity on the management’s plans on turning around the business,” it said.

On Monday, Ann Joo and Southern Steel told Bursa Malaysia they had inked a memorandum of understanding to form a JV company to capitalise on opportunities in the long product steel manufacturing business.

Ann Joo will sell its entire interest in Ann Joo Integrated Steel Sdn Bhd, Ann Joo Steel Bhd and Saga Makmur Industri Sdn Bhd to the JV company for RM907.5 million.

Southern Steel will also release its entire interest, including assets and liabilities, in Southern Steel Rod Sdn Bhd, Southern Steel Mesh Sdn Bhd, Southern PC Steel Sdn Bhd and Danstil Sdn Bhd to the JV company for RM742.5 million.

Under the RM1.65 billion deal, the JV company will be 55%-owned by Ann Joo, while the remaining 45% will be held by Southern Steel.

“Through the formation of the JV, Ann Joo could integrate into downstream industrial grade wire rod products which Southern Steel has been doing, while on the other hand, Southern Steel could utilise billet products from Ann Joo to replace imported billets.

“The managements expect the combined capacity for both iron-making and crude steel-making to increase to 0.5 million metric tonnes (MT) and 2.3 million MT respectively,” Kenanga IB added.

It believes the two companies may also seek to explore additional synergies in the longer term by tying up other operations within their bounds to further enhance value.

The corporate exercise will be completed by 1H20. Kenanga IB has set a target price of RM1.10 on Ann Joo.

“We are concerned over the impact of macro factors toward steel demand, such as slower global growth which has restricted private spending, as well as uncertainty in future government policy,” it said.

Separately, AmInvestment Bank Bhd has set a target price of RM0.73 on Ann Joo, while estimating its earnings for the financial year ending Dec 31, 2020 (FY20), will be eroded by about 60% from RM54.3 million to RM21.6 million.

It’s also staying cautious on Ann Joo as the company’s “fortunes as a long steel player” are inevitably tied to the construction sector, of which prospects have weakened.

“Over the longer term, assuming Ann Joo is able to help turn around Southern Steel, there could be a higher chance the merged entity could do better,” AmInvestment said in a note yesterday.

Shares of Ann Joo closed 2.56% higher at RM1.20 yesterday, giving the company a market value of RM622.08 million.

Southern Steel plunged 5.88% to 96 sen at market close yesterday, giving the group a market capitalisation of RM416.3 million.