- We maintain our HOLD recommendation on Ann Joo Resources with our fair value adjusted a tad lower to RM0.80/share (from RM0.82/share) on an unchanged P/BV target of 0.4x.

- The fair value adjustment follows a downgrade in our forward earnings outlook, following the release of its 3Q15 results that were below expectations.

- Based on our revised forecast, we now project Ann Joo to be in a core net loss position of RM5mil for FY15, before returning to the black in FY16F-17F (RM23mil and RM38mil).

- Excluding exceptional items, Ann Joo fell into the red for the second consecutive quarter. 3Q15 core net loss widened to RM29mil from RM2mil in 2Q15. This took 9M15 core net loss to RM18mil against a RM39mil gain a year ago.

- The one-off items were the result of faltering global steel prices. They are to mainly account for inventory writedowns and diminution in value of raw materials (9M15 – RM70mil; 3Q15 – RM53mil).

- For the 9M reporting period, Ann Joo’s steel manufacturing revenue fell by a sharp 30% on depressed steel prices and the continued threat from cheap Chinese steel.

- To be sure, imports of steel bars in to Malaysia exceeded 1 million tonnes during this period (+147% YoY). As a result, local rebar prices have fallen even further to RM1,500/tonne currently from ~RM1,800/tonne in 2Q15.

- While visibility was poor in 3Q15, management has seen some nascent signs of an uptick in demand since mid- October.

- A key development to watch out for is the expectations of deeper capacity cuts for steel mills in China by 1Q16 to address the widening demand/supply imbalances. A clearer picture could emerge six months down the road. Such a move, if it materialises, would provide a big lift to global steel prices.

- The group’s immediate focus is on reducing its inventory levels (~RM1.1bil as at 30 September), and manage its cost via the blast furnace.

- While Ann Joo is trading at trough P/BV values of 0.4x, we believe it is still a tad premature to turn constructive on the stock until more clarity emerges on the situation with Chinese imports.

Source: AmeSecurities Research - 27 Nov 2015