- We maintain our BUY call on Ann Joo Resources with an unchanged fair value of RM1.56/share. This is based on a target P/BV of 0.7x. Ann Joo reported 1Q15 results that were in-line with expectations. Core net profit rose 7% YoY to RM13mil despite a steep 24% YoY drop in revenue and a negative forex position of RM7mil. This made up c.24% of our full-year forecast (consensus: 35%).

- During the quarter, Ann Joo recorded inventory writedown charges and allowances for diminution in the value of raw materials totalling RM8mil.

- The YoY fall in topline was mainly due to lower export tonnage and depressed selling prices amid a weak international steel price outlook, although East Asian rebar prices have staged a slight rebound from its threeyear lows at ~US$350/tonne currently.

- Yet, manufacturing EBIT margins improved from 2.8% in 1Q14 to 4.6% in 1Q15. Apart from lower input cost, this reflects Ann Joo’s sustained operational improvements via its blast furnace.

- Looking ahead, domestic demand remains resilient. Orders have held up well for the past two months post- GST, notwithstanding a strong surge in March.

- But, the near-term outlook for the domestic steel industry remains fraught with uncertainties. The continued presence of cheap Chinese steel remains a key threat for Malaysian steelmakers.

- In 1Q15, the import of steel bars and wire rods from China surged 226% and 102% YoY, respectively. In fact, our channel checks reveal that a key local miller had turned into a net importer since 4Q14. Local bar prices are now trending at ~RM1,800/tonne, which is ~RM100/tonne lower from a year ago.

- On a more positive note, the re-affirmation of several bigticket infrastructure projects under the 11th Malaysia Plan (11MP) should provide Ann Joo with a lift.

- Also, there could be some respite from dumping activities by China if the Chinese government pushes through some environmental reforms, and given the latest bout of stimulus programs. Taken together, we however opine that a meaningful impact from the measures is unlikely to be immediate.

- From a valuation standpoint, the stock is trading at a trough P/B valuation of 0.5x. This is supported by the group’s share buy-back policy; c.22 mil shares (~4% of share capital) are being held as treasury shares at an average price of RM3.23/share.

Source: AmeSecurities Research - 28 May 2015