Investment Highlights

• We cut our FY18-20F net profit forecasts by 10%, 10% and 12% respectively, reduce our FV by 12% to RM1.41 (from RM 1.60 previously), but maintain our HOLD call. Our new FV is based on 8x revised FY20F FD EPS of 17.6 sen. We use FY20F (instead of FY19F) as our valuation base year to reflect the potential further earnings downturn in FY20F with the completion of major mega infrastructure projects in about two years from now.

• Ann Joo’s 9MFY18 core net profit of RM96mil (excluding RM25.2mil compensation for late delivery of plant and RM4.6mil forex loss) came in below expectations at only 63% and 59% of our full-year forecast and the full-year consensus estimates respectively. The variance against our forecast came largely from lower-than-expected sales volume coupled with higher input costs.

• 9MFY18 core net profit declined 33% YoY because of: (1) lower average rebar selling price of RM2,400/tonne (vs. RM2,600/tonne a year ago based on our estimates); (2) higher 12-month trailing average scrap metal price of US$364/tonne (vs. US$293/tonne previously); and similarly (3) increased 12-month trailing average coking coal price of US$ 202/tonne (from US$189/tonne previously). Rebar prices were hurt by weak domestic demand on the slowdown of mega infrastructure projects. On the other hand, input costs were higher during the 3Q mainly because of the stringent quality and quantity control in Chin that curbed supply.

• Ann Joo hinted at a soft 4QFY18F as buyers are still expected to stay on the sideline amidst uncertainties arising from the ongoing trade war between the US and China. This is partially cushioned by Ann Joo having bought forward its raw material requirements ahead of the high season.

• Meanwhile, we now assume the new average steel prices of RM2,380-RM2,460/tonne (from RM2,400-RM2,480/tonne) and reduced our sales volume growth to only 0%-1% per annum (from 1.5% previously) to factor in the lower domestic steel demand growth in FY18-20F.

• We remain cautious on Ann Joo as its fortunes as a long steel player are inevitably tied to construction sector, of which prospects have weakened following the cutbacks on public infrastructure project on grounds of fiscal prudence. However, Ann Joo will still sustain its earnings, underpinned by ongoing construction projects and exports sales. It is less vulnerable to a higher electricity tariff thanks to its investment in the hybrid blast furnanceelectric arc furnace (BF-EAF) technology.

Source: AmInvest Research - 3 Dec 2018