Investment Highlights

• We now project a net loss of RM125.8mil for FY19 and cut our FY20–21 net profit forecasts by 12% each to RM47.9mil and RM65mil respectively. We also reduce our FV by 11% to RM0.65 (from RM0.73 previously) based on 8x revised FY20F FD EPS of 8.1 sen. We maintain our UNDERWEIGHT call for Ann Joo Resources (Ann Joo).

• Ann Joo’s 9MFY19 results missed expectations. It reported a net loss of RM109.4mil, vs. our full-year net profit forecast of RM21.8mil and the full-year consensus net loss estimates of RM5.4mil.

• 9MFY19 significant losses were mainly due to compressed margins arising from: (1) a steep drop in the steel price, averaging at only RM2,000/tonne vs. RM2,450/tonne a year ago; (2) higher-than-expected iron ore prices with an average of US$102/tonne vs. US$68/tonne a year ago. Not helping either, were the general weak demand for building materials and increased competition from a foreigncontrolled steel producer in the local market.

• The company guided for a soft 4QFY19F mainly due to the persistent margin pressure arising from the double whammy of lower steel prices on intensifying competition and the high input cost of iron ore due to supply disruption in Brazil. However, Ann Joo is hopeful that 4QFY19F will improve sequentially on a slight pick-up in steel prices (now at RM1,940 vs. RM1,860 averaged in 3QFY19), coupled with softening iron ore prices amidst higher stock levels at certain ports in China (now at US$93 vs. US$110/tonne averaged in 3QFY19).

• The earnings downgrade is largely to reflect: (1) lower average steel price assumptions for FY19F–21F of RM1,900–RM2,100/tonne (from RM2,050–RM2,200/tonne previously); (2) higher iron ore price assumption of US$100/tonne for FY19F (from US$90/tonne previously). However, we maintain our assumption of US$90/tonne for FY20–21F; (3) flattish sales growth assumption of 0–1% on 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 are still weak. The government has very limited room for fiscal manoeuvre given the still elevated national debt. This means it has very limited ability to roll out new public infrastructure projects over the short term that will stimulate demand for steel.

Source: AmInvest Research - 28 Nov 2019