ANN JOO RESOURCES BERHAD 22 ND ANNUAL GENERAL MEETING DATO LIM HONG THYE, GROUP MANAGING DIRECTOR 30 MAY 2018
INDUSTRY OVERVIEW
INDUSTRY PERFORMANCE STEEL BAR PRICES (SOUTHEAST ASIA) 2004-2008 Commodities Boom 2012 2015 China Steel Overcapacity > 400 mil mt: 1) over-production; 2) surge in exports; 3) prices slumped below cost in 2H15 2016 Start of China Steel Reforms 2008 2009 Global Financial Crisis 2017 China Eliminated Induction Furnaces 3
2017 STEEL MARKET REVIEW SURGE IN STEEL PRICES HIGHER MATERIAL & FUEL COSTS Surge in steel price & profits driven by China s industry reforms Higher raw material & fuel prices: Iron ore 22% (2017 average @ USD 71/mt vs 2016 average @ USD 58/mt) Scrap 27% (2017 average @ USD 301/mt vs 2016 average @ USD 238/mt) Coking Coal 14% (2017 average @ USD 188/mt vs 2016 average @ USD 165/mt) EAF production cost further impacted by surge in graphite electrode prices (spot price surged from below USD 3,000/mt to USD 30,000/mt by 4Q17) China shut down: DEMAND SUPPLY DYNAMIC 115 mil mt steel capacity in 2016 & 17 closed est. 140 mil mt Induction Furnaces in 2017 China exports 31% to 75 mil mt in 2017 ASEAN-6 apparent steel consumption 5% (est.) to approx. 73 mil mt in 2017 Malaysian domestic construction steel demand at a low base on slow progress of infra projects Soft steel demand from O&G sector (source : Steel Business Briefing, Platts, World Steel News, SEAISI) 4
FINANCIAL HIGHLIGHTS
FINANCIAL HIGHLIGHTS P & L 2017 (RM mil) 2016 (RM mil) Chg (%) Cash Flow & Balance Sheet 2017 (RM mil) 2016 (RM mil) Revenue 2,195.2 1,870.1 17.4% Operating Cash Flow 193.2 340.1 EBITDA 329.7 286.2 15.2% Free Cash Flow * 171.9 319.7 Pretax Profit 252.9 202.1 25.1% Income Tax (47.5) (35.4) 34.2% Net Profit 205.4 166.8 23.1% Inventory Borrowings ** + 16.0 (+2%) - 113.0 (-12%) - 142.1 (-15%) - 341.8 (-26%) Basic EPS (sen) 40.52 33.32 21.6% Net Gearing 0.64x 0.85x DPS (sen) 19.0 15.0 26.7% * Free Cash Flow defined as Operating Cash Flow less Investing Cash Flow **Dividends paid in 2017 of RM 79 mil (for ordinary shares & RCPS) 6
PERFORMANCE REVIEW REVENUE Revenue (RM'mil) 2017 VS 2016 REVENUE INCREASED BY 17.4% 2,155 2,292 1,761 1,870 2,195 steel prices, mainly due to: Rise of steel prices in China & international markets Prices of key raw material such as iron ore, scrap & coking coal, on average rose in 2017 589 FY2013 FY2014 FY2015 FY2016 FY2017 1Q2018 1Q18 VS 4Q17 REVENUE DECREASED BY 3.5% revenue mainly due to exports, in line with the Group s focus on domestic market for finished products 7
PERFORMANCE REVIEW NET PROFIT Net Profit (RM mil) 12.27 23.39 PROFIT TURNAROUND (135.48) 166.78 205.38 61.45 FY2013 FY2014 FY2015 FY2016 FY2017 1Q2018 2017 VS 2016 NET PROFIT INCREASED BY 23.1% Net profit mainly due to: steel prices Hybrid BF-EAF technology that provides operational flexibility in volatile markets Refine sales mix (local vs exports, finished & semi-finished) to optimise profitability Slight domestic demand as progress of large scale infra projects gradually picked up in the latter months of 2017 1Q18 VS 4Q17 NET PROFIT INCREASED BY 10.7% net profit due to improved margin on higher selling price & improved productivity despite higher raw material & fuel (coke) cost 8
REVIEW OF LONG-TERM FINANCIAL PERFORMANCE ANN JOO GROUP REVENUE & PAT (2000-2017) Revenue (RM mil) 2,400 2,000 1,600 1,200 800 400 17 16 357 377 2006 AJSB (Malayawata) became subsidiary of AJR 2000 Took over Malayawata s management 24 349 37 69 443 529 20 566 127 1,435 2007 Privatization of AJSB 198 1,948 2,222 149 1,330 31 1,868 121 62 2,275 2,111 2,155 (19) 2016 Total Steel Solution Provider Oct 2011 BF Commissioning 2,292 12 23 1,761 167 1,870 PAT (RM mil) 205 200 2,195 150 100 50 0 (50) (100) 0 (135) (150) Revenue PAT 9
2017 FINANCIAL RESULTS: UPSTREAM LONG-PRODUCT MANUFACTURERS (RM mil) 253 PBT/(LBT) (2017 vs 2016) 202 165 156 71 26 8 Ann Joo Masteel Southern Lion Ind* 2016 (38) 2017 * Based on Steel Segment Results before Interest & Exceptional Items 10
MARKET CAPITALIZATION (RM mil) 2,000 UPSTREAM LONG-PRODUCT MANUFACTURERS (2015 - YTD2018) 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Ann Joo Southern Masteel Lion Ind 11
OUTLOOK & PROSPECTS
INDUSTRY TRENDS & PROSPECTS 1 2 PRICE OF STEEL BARS MALAYSIA & CHINA RAW MATERIALS, ELECTRODES & FUEL/UTILITIES 3 CHINA EXPORTS 4 US SECTION 232 5 6 MALAYSIA IMPORTS PROSPECTS FOR ANN JOO 13
STEEL PRICE INDUSTRY TRENDS USD/mt) 770 720 670 620 570 520 470 420 370 320 270 220 STEEL BAR PRICES : MALAYSIA VS CHINA USD 605 USD 590 China Rebar HRB400 (USD/mt Exwork) (source : Mysteel, MITI Weekly Bulletin) Malaysia Rebar Price (USD/mt delivered) * MS 146 standard HRB 500 @ RMB100-150/mt > HRB400 14
KEY RAW MATERIAL PRICES IRON ORE & SCRAP USD/MT 90 80 Iron Ore Price (Jan 17-May 18) (source: SBB) USD/MT 400 350 Scrap Price (Jan 17-May 18) (source: SBB) 70 300 60 250 50 200 Iron Ore/IODEX 62% Fe $/mt / North China import CFR $/t Average Quarterly Price IRON ORE To hover around USD60-80/mt level in 2018 (in-house view) Current spot price @ USD64/mt vs 1Q18 avg. @ USD74/mt, 13.5% Price Forecast 2018 2019 2020 Goldman Sachs USD 68/mt USD 63/mt USD 60/mt Australian Govt. USD 61.80/mt USD 46.70/mt USD 49.00/mt HMS CFR Turkey / Turkey import CFR $/t Average Quarterly Price SCRAP Price expected to move in-tandem with global EAF production levels, influenced by shortage of electrodes Additional EAF capacities in China a potential driver of scrap prices Current spot price @ USD337/mt vs 1Q18 avg. @ USD363/mt, 7.2% (source: Australia Business Insider, Platts, Steel Business Briefing) 15
KEY RAW MATERIAL PRICES COKING COAL & COKE Premium Coking Coal (Australia Exports FOB) (Jan 17-May 18) USD/MT (source: SBB) 300 250 200 150 USD/MT 350 300 250 Coke (CSR 62% North China FOB) (Jan 17-May 18) (source: SBB) 100 200 Premium Coking Coal (Australia Exports) Average Quarterly Price COKING COAL Expect long term prices of USD180-200/mt for coking coal (in-house view) Current spot price @ USD185/mt vs 1Q18 avg. @ USD229/mt, 19.2% Coke (CSR 62% North China FOB) Average Quarterly Price COKE Our Coke procurement prices are largely based on long term supply contracts that are index-linked to coking coal prices Current spot price @ USD337/mt vs 1Q18 avg. @ USD351/mt, 4.0% (source: Platts, Steel Business Briefing) 16
ELECTRODE DEMAND & SUPPLY IMBALANCE DEMAND-SUPPLY DYNAMICS International UHP electrode spot prices @ USD23k-25k/mt in 1Q18 Demand-supply imbalance needs 2-3 years to adjust MODERATE IMPACT TO ANN JOO Hybrid BF-EAF operations result in UHP electrode consumption 50-60% lower UHP electrode requirements depending on hot metal charging ratio Strategic supply contracts assure adequate supply of electrodes 17
IMPACT OF RISING UTILITY COSTS ON ANN JOO COMPETITIVENESS IN AN ENVIRONMENT OF HIGHER UTILITY TARIFF AVERAGE NATURAL GAS PRICES CHANGE (%) 1 Jun 2011 RM 16.07/mmbtu 1 May 2014 RM 19.32/mmbtu 20% 1 Nov 2014 RM 19.77/mmbtu 2% 1 Jul 2015 RM 21.80/mmbtu 10% 1 Jan 2016 RM 25.53/mmbtu 17% 15 Jul 2016 RM 27.05/mmbtu 6% 1 Jan 2017 RM 26.71/mmbtu 1% 1 Jul 2017 RM 28.05/mmbtu 5% 1 Jan 2018 RM 30.90/mmbtu* 10% * Exclude surcharge of RM 1.62/mmbtu, which translates to an effective tariff of RM32.52 beginning 1 Jan 2018 ELECTRICITY TARIFF 1 Jun 2011 33.54 sen/kwh Average Tariff Change (%) 1 Jan 2014 38.53 sen/kwh 15% Electricity tariff schedule to be maintained until 31 Dec 2020 with reduction in SIT for Tariff Category D, E1s, E2s and E3s (Prai plant), reflecting an increase of 2% vs. 2017 E3s Tariff OPERATIONAL FLEXIBILITY AMIDST ELECTRICITY & NATURAL GAS TARIFF Ann Joo s flexibility in optimizing its hot metal/scrap mix & resulting generation of BF off-gas, which mitigates its electricity & natural gas requirements relative to pure EAF operations 18
CHINA SHIFTED FOCUS TO DOMESTIC MARKET CHINA SHIFTED FOCUS TO DOMESTIC MARKET : CHINA S EXPORTS TO ASEAN-6 42.5% Y-O-Y POTENTIAL EXPORTING COUNTRIES TO SEASIA : ALTERNATIVE TO CHINA ASEAN-6 Imports from China 2016 (mt) 2017 (mt) Long Products (mt) Turkey Russia Ukraine Iran Bar 13.3 mil 2.9 mil Wire Rod 4.0 mil 3.0 mil Other steel products 19.1 mil 15.0 mil TOTAL 36.4 mil 20.9 mil (mil mt) 40 30 20 10 0 China Exports to ASEAN-6 34 36 25 21 2014 2015 2016 2017 2016 Production 21.9 mil 17.6 mil 5.9 mil 7.7 mil 2016 Exports 10.2 mil 4.3 mil 4.6 mil 0.5 mil Long Lead Time (source: SEAISI, World Steel Association) KEY CONSTRAINTS FOR IMPORTS FROM ALTERNATIVE MARKETS Large Minimum Shipment Order ASEAN-6 is traditionally a secondary market for alternative source of imports 19
US SECTION 232: IMPORT STATISTICS Aust & NZ, 0.49, 1% 2017 US Steel Imports (Mil MT) Canada, 5.68, 16% Mexico, 3.16, 9% EU, 5.01, 15% South Korea, 3.40, 10% Non-Exempted Countries, 12.19, 35% Brazil, 4.67, 14% Non-Exempted Countries (Mil MT) Other Non- Exempted Countries, 2.54, 21% Russia, 2.87, 24% China, 0.74, 6% Japan, 1.73, 14% Turkey, 1.98, 16% Taiwan, 1.13, 9% India, Indonesia & Thai, 1.20, 10% Non-Exempted Countries Brazil South Korea Mexico Aust & NZ Canada China Turkey India, Indonesia & Thai Taiwan Japan Russia Other Non-Exempted Countries (source: US Census Bureau) 20
MALAYSIA : SAFE-GUARD DUTIES FOR 3 YEARS REBAR & WIRE ROD REBAR SAFEGUARD DUTY RATE (%) 14 April 2017 13 April 2018 13.42 14 April 2018 13 April 2019 12.27 14 April 2019 13 April 2020 11.10 WIRE ROD & DBIC SAFEGUARD DUTY RATE (%) 15 April 2017 14 April 2018 13.90 15 April 2018 14 April 2019 12.90 15 April 2019 14 April 2020 11.90 Bar Import (MT) 600,000 400,000 Provisional SG Duty @ 26/9/16 SG Duty @14/4/17 Wire Rod Import (MT) 400,000 300,000 200,000 Provisional SG Duty @ 27/9/16 SG Duty @15/4/17 200,000 100,000 0 0 Bar Import From China Total Bar Import Suspected Billet Import from China Note : Suspected Billet Import from China under HS Codes 7228 20 1900/30 1000/30 9000/70 1020 REBAR 2015 2016 2017 1Q18 TOTAL IMPORT 1,357,492 1,828,318 661,654 279,909 Wire Rod Import From China Total Wire Rod Import (source : Department of Statistics Malaysia) WIRE ROD 2015 2016 2017 1Q18 TOTAL IMPORT 1,245,787 1,027,265 509,951 156,813 IMPORT FROM CHINA 1,279,638 1,675,948 391,910 166,773 IMPORT FROM CHINA 832,017 568,395 184,851 43,019 21
PROSPECTS KEY DRIVERS - 2018 DOMESTIC DEMAND REGIONAL MARKET DYNAMICS Possible new government policies impact Softer domestic demand in 2Q18 due to seasonal factors (Ramadan & Raya) that typically affect construction activity Infrastructure expenditure is still expected to be the key economic driver to Malaysia under the new Government China s steel industry reforms (shift focus to quality instead of quantity) ASEAN-5 steel demand expected to grow by 6.6% 1 in 2018 Entry of new supply into the market US Section 232 impact CAPITAL MANAGEMENT Continue to strengthen balance sheet Ability to invest in operational improvements / plant upgrades & strategic expansion opportunities (regional or domestic) Note 1 : ASEAN-5 comprise Malaysia, Vietnam, Philippines, Indonesia & Thailand (source: World Steel Association) 22
INVESTMENT RESEARCH ON ANN JOO
RESEARCH REPORTS BASED ON 1Q18 RESULTS Research House Date Of Report Recommendation Target Price (RM) PE (X) Net Profit (RM mil) EPS (SEN) FY18 FY19 FY18 FY19 FY18 FY19 TA Securities 28/05/2018 Buy 3.15 6.2 6.0 226 240 40.4 42.0 Maybank Investment Bank 28/05/2018 Buy 3.10 6.4 6.3 219 224 39.2 39.9 UOB KayHian 28/05/2018 Buy 3.05 7.3 6.6 215 240 43.0 48.0 Kenanga Investment Bank AM Investment Bank 28/05/2018 Outperform 2.75 7.3 6.8 183 196 34.5 37.0 28/05/2018 Hold 2.70 7.5 6.8 211 230 33.7 36.8
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