Investment Highlights

• We now project net losses of RM73.5mil and RM45.7mil in FY20–21F (vs. net profits of RM47.8mil and RM64.9mil previously) but keep our FV relatively unchanged at RM0.67 (albeit with a new valuation basis of 0.3x P/B from a P/E-based valuation method previously) as we do not expect Ann Joo to turn in a profit during our forecast period. Our new valuation basis of 0.3x P/B is at a 40% discount to Ann Joo’s historical P/B of 0.5x to reflect the prolonged downcycle in both the local and global steel sectors currently. Maintain UNDERWEIGHT.

• The earnings downgrade is largely to reflect: (1) lower average steel price assumption in FY20F–21F of RM1,860– RM1,920/tonne (from RM2,000–RM2,100 previously) and; (2) higher iron ore price assumption of US$95– US$100/tonne during the same period.

• Ann Joo’s FY19 core net loss of RM144.8mil came in within our expectation but much wider than consensus estimates. It slipped into the red from a RM124.3mil net profit a year ago on the back of: (1) lower average steel price realised of RM1,950/tonne (vs. RM2,000/tonne a year ago); (2) higher average iron ore cost of US$97/tonne (vs. US$75/tonne a year ago). Not helping either, was a decline in sales volume due to the weak demand on the back of the slowdown in the local construction and property sectors, coupled with some market share loss. Furthermore, there was also a general weak demand for a foreign-controlled steel producer in the local market.

• Key takeaways from Ann Joo’s analyst briefing yesterday are:

1. The company guided for a better 1QFY20 backed by the recovery in local steel bar prices to about RM2,100/tonne vs. RM1,950/tonne 3–6 months ago (However, we are mindful of the impact of the Covid-19 outbreak on international steel prices and the domestic political turmoil that could stall the rollout of public projects); and

2. It is mindful of the still elevated iron ore cost due to the supply constraint in Australia due to the shipping restriction triggered by the Covid-19 outbreak as well as a seasonal tropical cyclone, and high scrap prices due to heavy import activities in Turkey.

• We remain cautious on Ann Joo as its fortunes as a long steel player are inevitably tied to the local construction and property sectors 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. Not helping either, is the recent political turmoil that may temporarily stall the rollout of public projects.

Source: AmInvest Research - 25 Feb 2020