-  We maintain our BUY call on Ann Joo Resources with an unchanged fair value of RM1.75/share – pegged at 0.8x its FY14F book value. Stripping off one-off adjustments incurred in 2Q14, Ann Joo reported a core net profit of RM12mil. This was in line, constituting 52% of our FY14F estimates. The exceptional charge of ~RM8mil relates to one–off stock adjustments for its raw materials.

-  2Q14 core net profit of RM25mil was flat QoQ. This was commendable, in our view, despite:- (i) depressed selling prices due to rising steel imports (notably from China); and (ii) higher overhead cost due to a plant breakdown in late February; it had since been rectified in 2Q14.

-  Even with the production downtime and weak selling prices, Ann Joo’s 1H revenues still expanded by a strong 32% YoY (core net profit: + 27% YoY) on a pick-up in both local and international demand. As such, manufacturing EBIT margin was just a tad lower at 4% vs 4.6% a year ago.

-  The rising influx of cheap Chinese steel imports remains a key concern. Imports of bars and wire rods from China reached ~130k tonnes in June 2014 alone (+40% QoQ).

-  As such, management believes that steel prices may continue to remain subdued as domestic millers are compelled to lower their prices in the face of accelerated dumping activities by Chinese mills. To be sure, local bar prices are hovering around RM2,000/tonne currently –some RM80/tonne or c.4% lower than the last quarter.

-  On the flipside, Ann Joo is able to better withstand these competitive pressures going forward, thanks to the much-improved cost structure of its blast furnace (BF).

-  Furthermore, the muted pricing outlook for coking coal and iron ore (key inputs for Ann Joo’s BF) puts the group in a more advantageous position over local/regional scrap-based Electric Arc Furnace (EAF) operators.

-  In any case, we expect Ann Joo’s sequential earnings momentum to pick-up from 2H14 as its production levels normalise despite a weak pricing outlook.

-  Equally, potential trade measures that could be imposedon both long and flat products in Malaysia could help level the playing field against the dumping of cheap Chinese steel imports.

-  Trading at a trough P/BV of only 0.6x, the stock’s current levels represent a good entry point for investors seeking exposure to any imminent rebound in steel prices.

Source: AmeSecurities