Ann Joo Resources Bhd is a company that is primarily involved in the manufacturing of steel and steel related products. This business is divided into 2 sectors which are the manufacturing and trading sectors. Ann Joo is the largest steel counter listed in Bursa Malaysia in terms of market capitalization.

Manufacturing Sector – Manufacturing and trading of iron, steel and steel related products.  Also flat products include slabs, hot-rolled coil, cold-rolled coil, coated steel products, tinplate and heavy plate. They are used in automotive, heavy machinery, pipes and tubes, construction, packaging and appliances. Long products include billets, blooms, rebars, wire rod, sections, rails, sheet piles and drawn wire. Examples in the image below.

Trading Sector – The trading division traditionally supplies both flat and long steel products to various industries such as fabrication, oil & gas, marine and offshore engineering industries. Trading of steel and steel related products, hardware, building and construction materials and operations of steel service centres.

For their financial year 2017 Ann Joo has increased their revenue of 18% (2.2Bil) compared to the previous year for 2016 is (1.87Bil). Also their Net profit jumped 23% and their EPS of 40.52 sen. Net gearing is also reduced from 0.85 to 0.64 which means they are paying back their debts. Also for their trailing 4 quarters they have been giving 12 sen dividend per share with a dividend yield of 6.7% which is quite attractive. Their dividend payout ratio is 47% of the group’s net earnings.

Risks

  1. Fluctuation of steel prices
  2. Steel prices fluctuates according to the supply and demand of the market, with more projects such as mega projects like ECRL, MRT, LRT, etc, prices of steel should go up as there are more demand for steel.
  3. Cost of raw material to produce steel – As they are running on hybrid blast furnace-electric arc furnace technology, they have the flexibility in choosing products mix of raw materials such as iron ore, scrap and billets but they are still susceptible to the prices of raw materials
  4. Currency fluctuations – Since their business is to sell steel materials mainly to Malaysia and Singapore, they are also susceptible to currency fluctuations due to purchase of raw materials. FYI they do not export steel to US but they are hedging on USD currency as shown below.

Cash flow has also been decreasing, from 340 mil FY 2016 to 193 mil on FY 2017. This is because they implemented a Long-Term Incentive Plan (LTIP) which is around 7.2mil in their efforts to retain their staff. In the year of 2017 there is still a positive free cash flow of 160mil but in the year of 2018 it has just turned negative of -213mil which this worries me but why has it became negative? From what I can see it is mainly due to these 2 reasons, Long-Term Incentive Plan (LTIP) and also their trade receivables increased dramatically.

Trade receivables has also been increasing from 2016 at 303.7mil to 2017 at 393.8mil. From the bottom picture we can know that there is a major increase for 1- 30 and also 91 – 120 days past due not impaired. This can be alarming because if they sell a lot but buyers are not able to pay them, it might lead to bad debt and might cause the profitability to suffer.

Now for deeper analysis!

10 years CAGR

Revenue = 6.63%

Profit before Tax = 17.04%

Net Profit = 19.17%

Dividend = 10.98%

Net Profit Margin = 11.79%

Revenue has been fluctuating over the years, this is due to the industry and also because of the demand for steel in the industry but it is still growing at a CAGR of 6.63%, mega projects such as ECRL, MRT, LRT, etc should boost the revenue. We won’t know the exact figures on how much extra revenue will Ann Joo receive from these mega projects but their revenue will surely go up in time when the projects are ongoing.

As for their net profit, it is growing rapidly with a CAGR of 19.17% but we can see a slowdown on the year 2018, it is due to the change in government which they halt all mega projects until they have confirmed the renegotiation with China, after the confirmation of the ECRL which has reduced cost, moving forward we can know that their profit will once again increase.

Dividend has also been increasing YoY with a CAGR of 10.98% and their dividend payout is only at 51.55% for the year 2018 which is good and they still have sufficient cash to expand their business.

Directors are also holding about 57.8%, from this we can deduce that the director’s interest is aligned with the shareholders of the company.

Disclaimer:

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