-  Maintain BUY on Ann Joo Resources with an unchanged fair value of RM1.86/share – pegged at 0.9x of its FY13F BV/share.

-  Stripping off unrealised forex losses of RM8mil from US dollar-denominated loans of US$186mil (RM590mil), Ann Joo reported a flattish core net profit of RM10mil QoQ. Earnings for the quarter were also pulled down by a RM2mil inventory write-down for its trading division.

-  The group returned to the black in 1H13 with core earnings of RM20mil vs a RM6mil loss in 1H12 – constituting 49% of our FY13F forecast, and 46% of consensus. Turnover fell by 19% YoY largely on a marked decline in export tonnage and muted selling prices due to the rising influx of Chinese imports in the region.

-  Despite the tough operating environment, Ann Joo managed to return to the black in 1H thanks to a significant improvement in cost structure at its blast furnace (BF). Local sales of steel products rose 9% QoQ but no export sales were closed during the quarter.

-  Notably, the group has improved its raw material procurement mix (e.g. localisation of iron ore supplies) and toned down the utilisation rate of its BF (from 85% to 70%) since end-May to maximise the production of hot metal that is fed into its steel-making process.

-  Management is seeing some imminent signs of a nascent recovery in semi-finished/finished steel prices amid a normalisation of input cost, except for iron ore.

-  Regional billet prices have recovered to ~US$530/tonne (RM1,700/tonne) after briefly falling below production cost in early-May. As prices recover, the group is readying itself to resume export orders in 2H13 when the weakening ringgit boosts its price competitiveness.

-  Domestic demand has held steady and should accelerate on resumption in infrastructure activities towards 4Q13. To be sure, local rebar prices have moved up after the Raya break at RM2,050/tonne currently after falling a tad below the RM2,000/tonne level last month.

-  Also, Ann Joo foresees the influx of imported wire rod nearing its tail-end after some pre-emptive anti-dumping moves taken by the government. Local wire rod prices are now on par with rebar prices after dipping below the latter in 1Q12 when dumping activities first surfaced.

-  Ann Joo remains our top pick for leverage to a recovery

Source: AmeSecurities