- We maintain our BUY call on Ann Joo Resources at an unchanged fair value of RM1.74/share – pegged at 0.8x its FY14F book value. Ann Joo reported 2QF14 core net profit of RM14mil (+8% QoQ) despite lower revenue of RM508mil (-16% QoQ). This took 9M14 core earnings to c.81% of our full-year estimates of RM48mil – which we are keeping in view of an expected seasonal lull in 4Q.

- Comparing on a YoY basis, 9M14 earnings improved significantly to RM39mil from a paltry RM1mil in 9MFY13. Despite a tough operating environment, manufacturing revenue surged 37% YoY on higher sales volumes despite depressed international steel prices brought about by dumping activities by Chinese steel millers.

- Manufacturing margins, minus the one-off inventory adjustments of RM8mil in 2Q14, would have improved by nearly 3ppts QoQ to 5.5% (9M14: 3.5% vs. 9M13: 1.3%). To be sure, Ann Joo’s blast furnace has been benefiting from lower input cost such as iron ore and coke. The latter’s price has fallen closer to the US$70/tonne level vs. a peak of nearly US$190/tonne in early 2011.

- The rampant dumping by Chinese steel mills continues to be a key challenge in the near term. In 9M14, total imports of steel bars and wire rods from China surpassed 900k (c.64% of total imports of 1.4mil in Malaysia) and could easily break the 1 mil tonnes level by year-end.

- On a positive note, local steel demand should remain bright moving into 2015. The Malaysian Iron & Steel Industry (MISIF) has projected local consumption to reach 11.5 mil tonnes next year with long products accounting for roughly half of it (5.9 mil tonnes).

- We envisage any positive resolution by the Malaysian government to push the through effective trade measures against Chinese imports to be a major re-rating catalyst for local steel players.

- Furthermore, recent market talk revealed that the Chinese government may remove rebates and VAT incentives for some of its steel exports by January 2015, notably on boron-added steel that reportedly makes up half of China’s total steel exports.

- These positive measures are crucial to equalise the pricing advantage (reportedly up to 13%) that Chinese steel producers currently enjoy. On our estimates, every 1% increase in Ann Joo’s steel bar selling prices will lift its earnings by 7%-15% (RM5mil to RM7mil p.a.).

- Despite its improving operational prowess, Ann Joo continues to trade at below trough P/B values of 0.5x. Investor sentiment could turn if there are tangible moves to reign in on the rampant Chinese imports.

Source: AmeSecurities