- Maintain BUY on Ann Joo Resources with an unchanged fair value of RM1.75/share – 0.8x its FY14F BV. Ann Joo recorded a 1Q14 net profit of RM12mil against revenue of RM686mil. Its results were in line – constituting 26% of our full-year estimates (consensus: 28%).

- The group has resumed dividend payments after a two yearabsence, declaring a first interim single-tier DPS of 2 sen for the quarter. Our FY14F DPS stands at 5.5 sen (yield: 4.8%) with a payout ratio of 44%.

- The 29% YoY top line growth was primarily driven by higher sales volume in 1Q14, which offset sluggish steel prices that were exacerbated by the influx of cheap Chinese steel products. This resulted in a RM18mil inventory write-down.

- We nevertheless expect Ann Joo’s sales momentum to continue in the coming quarters, although selling prices will likely remain muted for now.

- 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.

- But Ann Joo’s key re-rating prospects still largely hinges on government policies in the face of the rising influx of imported steel products.

- Our channel checks point to some nascent moves by the Malaysian government to realign the level playing field -e.g. imposition of import licenses for allow wire rods effective 1 January 2014.

- To be sure, some pockets of improvement have been seen, including in the local wire rod market. This segment is seeing a recovery from the depressed levels seen last year, when wire rod prices dipped below steel bars.

- But, more could be done in terms of policy execution - particularly in the face of rising competition from large Chinese steel makers.

- By and large, Ann Joo remains our top pick for a leverage to any meaningful pick-up in steel prices. This comes as the group continues to reap more benefits from improving efficiencies at its blast furnace.

- Steel manufacturing margins have greatly improved to 14.5% in 1Q14 (1Q13: 6.5%) despite the inventory write-downs. This reflects the group’s improved cost structure although selling prices remain muted.

Source: AmeSecurities