Ann Joo Resources Bhd
(Dec 3, RM1.35)
Maintain hold with a lower target price (TP) of RM1.44: Ann Joo Resources Bhd’s cumulative nine months ended Sept 30, 2018 (9MFY18) core earnings of RM101.9 million (-33.4% year-on-year [y-o-y]) accounted for 64 to 84% of the consensus and our full-year forecasts.

 
We deem the results as below expectations as we now expect the fourth quarter of FY18 (4QFY18) to come in even weaker (on a quarter-on-quarter [q-o-q] basis) on the back of a rainy season (which in turn restricts construction activities and hence domestic demand for steel products) and lower average selling prices (ASPs) arising from intense competition.

Quarter-on-quarter, despite a slight increase in revenue, core earnings fell 58.4% to RM12.4 million, due to weaker ASPs and higher raw material costs, which in turn resulted in margin compression in both the manufacturing and trading segments.

Y-o-y, the group’s core earnings dropped 75.4% and 33.4% to RM12.4 million and RM101.9 million respectively, attributed to lower sales tonnage, weaker ASPs and higher raw material costs which in turn resulted in margin compression in both the manufacturing and trading segments.

The domestic steel industry remains challenging with competition from a new player (namely Alliance Steel), a slowdown in construction activities post-14th general election (GE14) and high coke prices from supply restrictions in Australia.

Management expects weak local steel demand to linger into the first half of FY19 (1HFY19), with hopes of a rebound in 2HFY19.

Given the soft local market demand, Ann Joo continues to place efforts to increase its export exposure.

However, we believe this will not help boost its earnings significantly as: i) a majority of products exported as of now are pig iron, which constitutes only a small portion of revenue (about 3% based on our estimates) as only 20% of pig iron produced is exported; and ii) it may not be easy to export billets in the countries where Ann Joo is eyeing as most of these countries are taking a protective stance on imports (amid the global trade tension) and a recent fall in prices of China billets has weakened Ann Joo’s price competitiveness.

Note that prices of China billets fell about 20% in November 2018, likely from laxer winter production curb measures accompanied by weak demand.

Going forward, Ann Joo’s profitability remains largely dependent on local steel demand despite attempts to increase export market exposure. We expect earnings to remain tepid as the slowdown in construction activities will likely remain weak in the near term.

We have lowered our earnings forecasts by 5%/21%/10% to account for lower ASPs and higher coke price assumptions.

FY19 now shows a slight drop in earnings from FY18 as the latter saw strong earnings for the first quarter ended March 31, 2018 (1QFY18) from construction activities pre-GE14.

We have maintained our “hold” recommendation with a lower TP of RM1.44 as we believe the market has priced in the gloomy market outlook for the steel industry from a slowdown in construction activities. — Hong Leong Investment Bank Research, Dec 3