KL Trader Investment Research Articles

Author: kltrader   |   Latest post: Wed, 5 Aug 2020, 9:21 AM


Ann Joo Resources - a Temporary Setback

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Earnings to pick up in 2H19, maintain HOLD

1Q19 results fell short on lower domestic sales volume, depressed ASP and higher raw material costs. We cut our FY19E-21E core net profit by 43-44%. Accordingly, our TP is also reduced by 13% to MYR1.34 based on revised 8.8x FY19 PER. While increasing raw materials cost remains a concern, we believe an improving domestic steel demand outlook, higher export tonnage and unutilised balance of investment tax allowance for its blast furnace installed in 2011 could cushion the impact. HOLD.

Weak start to 2019, below expectations

Excluding one-off items, AJR reported 1Q19 core net loss of MYR11.7m (vs. core net profit of MYR61.4m in 1Q18 and MYR42.2m in 4Q18). This came in below both our full-year estimate and consensus. The weaker results were due to margin erosion on depressed ASP, lower domestic sales volume (but partially mitigated by higher export sales) and higher raw materials costs. Meanwhile, its net gearing level increased to 0.77x from 0.73x in 4Q18 to support its working capital but is still manageable.

Expect better 2H19

Management guided that the domestic steel market will remain soft in 2Q19 due to the festive (Hari Raya Aidilfitri) season. However, this softer demand would be offset by further increase in export tonnage and improving local demand from 2H19. Management also plans to upgrade its production facilities, including a mid-term relining exercise for its blast furnace in June 2019 to improve production efficiency. On the steel oversupply situation, management has been engaging with the Government proactively to address it and expects feedback only in 2H19.

Lower earnings by 43-44%

We cut FY19E/20E/21E core net profit by 44%/43%/43% as we increase hot metal cost assumptions by 5-7%, imputing higher iron ore cost in the 1H19 and facilities upgrade costs. We maintain our HOLD call but with a lower TP of MYR1.34. We peg the stock to its updated 3-year mean PER of 8.8x (previously -1SD at 6.0x) on an improving domestic steel demand outlook in view of the resumption of key infrastructure and large-scale development projects.

Source: Maybank Research - 5 Jun 2019

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ANNJOO 0.68 -0.005 (0.73%) 583,100 

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