- We maintain our BUY call on Ann Joo Resources with a lower fair value of RM1.66/share. This pegs the stock’s P/B target a tad lower at 0.8x (previously: 0.9x) to reflect a weaker operating environment in the near term.

- Ann Joo reported a 3Q13 net loss of RM10mil, dragging down 9MFY13 net profit to only RM1mil. While this was an improvement from a RM29mil loss in 9M12, we consider Ann Joo’s results to be below expectations, as 4Q13 is unlikely to chart a significant improvement.

- Despite higher sales volume and the resumption of smaller orders of billet exports, manufacturing revenue was flat QoQ on lower selling prices.

- Exacerbating the situation was a RM17mil forex loss incurred during the quarter (9M13: RM9mil) as a weaker RM-USD exchange rate was not sufficiently offset by export sales.

- As international prices remained subdued during the quarter, the group refocused on paring its inventory levels. This was done by re-channelling some of its excess billet capacity towards domestic sales instead of exports. The group also targets to lower its net gearing ratio to 1.5x from 1.8x as at 30 September 2013 (our FY14F target: 1.6x).

- Management believes that the price outlook for finished steel has still not improved for the past two months, as the billet-bar spread had turned negative (~US$25/tonne).

- An overarching concern is the continuous dumping of Chinese steel products within the region. This negative development that had previously distorted the local wire rod market has begun to seep into the rebar segment.

- Our channel checks indicate that imported Chinese rebar have surfaced in the Klang Valley earlier this month. On the flipside, Ann Joo is pushing for more billet exports before year-end amid a weaker ringgit – as there is still sustainable monthly demand of c.200k within the region.

- We concur with management as we foresee a step-up in infrastructure spending within ASEAN – including reconstruction activities in the Philippines post-typhoon Haiyan. Coupled with a step-up in local demand, this should provide a kick to steel prices moving into 2014.

- We also draw comfort that the operational efficiency at Ann Joo’s blast furnace continues to improve – average production cost has dropped nearly 50% since 1Q12.

- Despite the near-term headwinds, Ann Joo remains our top pick to leverage on improving steel prices. At the current levels, the stock is trading below its trough P/B level.

Source: AmeSecurities