- Maintain BUY on Ann Joo Resources with our fair value lifted from RM1.66/share to RM1.75/share, as we rollforward its valuation base to FY14F (0.8x FY14F BV).

- Ann Joo reported better-than-expected results, reporting 4Q13 net profit of RM11mil against an RM18mil loss in 3Q13. While we had expected the group to return to the black, the quantum surprised us on the upside.

- While top line growth was flattish (+2% YoY), the turnaround in FY13 was the culmination of Ann Joo’s improved cost structure amid a challenging operating environment (including a RM26mil forex loss from a weaker ringgit).

- Furthermore, Ann Joo’s BF plant provides the group with more flexibility in altering its hot metal/scrap mix. This, in turn, should help negate part of the 19% hike in electricity rates from 1 January 2014.

- Looking ahead, Ann Joo is set to adopt a more aggressive stance in driving sales volumes. Already, orders appear to be perking up with export volumes doubling QoQ in 4Q. The positive sales momentum is set to continue in 1Q14. The weakening ringgit should boost Ann Joo’s competitiveness although steel prices remain somewhat muted. Ann Joo is also looking to strengthen its financial position. One such strategy is to reduce its high inventory levels by liquidating some of its semi-finished stock in the previous quarter. Another is to convert some of its US$-denominated debts into Ringgit.

- The dumping of Chinese steel products – more recently involving steel bars - remains a key risk. Local millers are engaging with the government to resolve this issue.

- We however expect market conditions to normalise in the coming months. The imposition of import licenses to regulate boron-added wire rods is a start.

- Furthermore, Ann Joo’s increasingly competitive cost structure and the strengthening Yuan should help moderate the negative impact of Chinese imports.

- Some local orders for wire rods in 4Q13 are already yielding a small margin. Yet, this represents a big improvement from the depressed wire rod market earlier last year, with prices even dipping below steel bars in some cases.

Source: AmeSecurities