Investment Highlights

• We cut our FY19–21F net profit forecast by 51%, 17% and 14% respectively, reduce our FV by 16% to RM0.73 (from RM0.87 previously) based on 8x revised FY20F FD EPS of 9.1 sen. We maintain our UNDERWEIGHT call for Ann Joo Resources (Ann Joo).

• Ann Joo’s 1HFY19 results missed expectations. It reported a net loss of RM44.4mil, vs. our full-year net profit forecast of RM44.6mil and the full-year consensus net profit estimates of RM40mil.

• The 1HFY19 losses were mainly due to: (1) a steep drop in the steel price, averaging at only RM2,060/tonne vs. RM2,500/tonnes a year ago; (2) higher-than-expected iron ore prices with an average of US$106/tonne vs. US$63/tonne in 1HFY18. Not helping either were the general weak demand for building materials and increased competition from a foreign-controlled steel producer in the local market.

• The company guided for a soft 3QFY19F mainly due to the margin compression on the back of the even more depressed steel prices in the local market on the back of intensifying competition. Also, the input cost of iron ore remains high despite a respite since August 2019 on softening prices amid higher stock levels at certain ports in China.

• The earnings downgrade is largely to reflect lower average steel price assumptions for FY19–21F of RM2,050- RM2,200/tonne (from RM2,100-2,300/tonne previously). Meanwhile, we maintain our iron ore price assumption of US$90/tonne and keep our flattish sales volume growth assumption of 0–1% against the backdrop of a muted outlook for the local construction sector.

• We remain cautious on Ann Joo as its fortunes as a long steel player are inevitably tied to the construction sector, of which prospects have weakened. Given the still elevated national debt, the government has no choice but to remain steadfastly committed to fiscal prudence which means the revival of the East Coast Rail Link project could be a “zero-sum game” as it may impede the government’s ability to implement other public infrastructure projects.

Source: AmInvest Research - 29 Aug 2019