Investment Highlights

• We now project net losses of RM148.1mil, RM54.1mil and RM32.5mil in FY20–22F (vs. net losses of RM73.5mil, Rm45.7mil and RM30.9mil previously). We also lower our FV to RM0.55, based on 0.25x P/B, which is at a 50% discount to Ann Joo’s historical P/B of 0.5x to reflect the prolonged down cycle in both the local and global steel sectors currently. Maintain UNDERWEIGHT.

• The earnings downgrade is largely to reflect lower sales volume assumption for FY20–22F, partially mitigated by: (1) higher average steel price assumption in FY20F–22F of RM2,100, RM2,150 and RM2,200/tonne (from RM1,860, RM1,920 and RM1,920/tonne previously) and; (2) lower iron ore price assumption of US$95–US$90/tonne during the same period (from US$95-US$100 previously).

• Ann Joo’s 1QFY20 core net loss of RM30.9mil came in wider than our expectations and consensus estimates. Core net loss widened from RM13.2mil a year ago on the back of: (1) lower sales volumes, both domestic and the export market on plant and port shutdowns on the back of the movement control order (MCO) starting 18 Mar 2020; (2) higher average iron ore cost of US$89/tonne (vs. US$83/tonne a year ago). However, this was partially mitigated by higher average steel price realised of RM2,046/tonne in 1QFY20 (vs. RM1,889/tonne in 1QFY19).

• Ann Joo is optimistic that domestic steel prices will improve in 2H20 vs. 1H20.

• In 1H20, despite the steep slowdown in local steel consumption as construction activities came to a complete halt during the initial part of the MCO, followed by a slow resumption thereafter (weighed down by various standard operating procedures, particularly, the Covid19 testing for migrant workers), domestic steel prices actually improved slightly.

• Ann Joo believes the key reasons were: (1) a key foreigncontrolled steel producer decided to export a significant portion of its production (taking advantage of the slight premium pricing in the export market vs. the local market); and (2) the MCO inflicted a dent on production of certain local players. These significantly eased the supply pressure in the local market.

• With local construction activities are expected to pick up momentum in 2H20, domestic steel demand is poised to improve, boosting prices.

• Meanwhile, Ann Joo is unperturbed by the recent surge in the iron ore spot price above the US$100/tonne mark as it was largely due to a temporary supply shortage arising from the shutdown of Vale’s iron ore mines in Itabira, Brazil, which coincided with a recovery in demand from China. The plant has now been reopened, paving the way for iron ore prices to ease back to the US$80–90/tonne level.

• 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.

Source: AmInvest Research - 1 Jul 2020