Ann Joo Resources Berhad (Ann Joo) registered a core LATAMI of RM31.2mn during 1Q23 compared to a core LATAMI of RM147.7mn in 4Q22 and core PATAMI of RM32.6mn in the same period a year ago. The result was substantially below our in-house and consensus full year earnings forecast. We anticipate the bearish sentiment to continue lingering in the steel market in FY23 due to dull domestic demand, unfavourable supply-demand dynamics from China, as well as challenging global economic conditions. Maintain a HOLD call for Ann Joo, with a lower TP of RM0.96.

• Below expectations. 1Q23 core LATAMI of RM31.2 was below our inhouse and street estimates due to lower-than-expected average selling prices (ASPs) coupled with higher inventory cost.

• Dividend. No dividend was declared.

• QoQ. Revenue tumbled by 15.6% QoQ amidst narrowing LBT of RM35.3mn (versus LBT of RM93mn), no thanks to lower exports sales despite higher ASPs. Nonetheless, steel bar price improved to RM2,688/mt from RM2,601/mt during 4QFY22, powered by China's economic reopening.

• YoY. On the same note, revenue declined marginally or by 0.4% YoY on the back of PBT margin that slipped by 11.6 ppts YoY. Discouraging revenue and earnings were the result of lower exports sales and ASPs. The demand was sluggish due to the absence of mega projects in the domestic market, coupled with weak growth in China's property sector, a major dampener to the Group’s performance.

• Outlook. We anticipate the bearish sentiment to continue lingering in the steel market in FY23 due to dull domestic demand, a less-than-favourable supply-demand dynamics from China, as well as challenging global economic conditions. Higher operating costs, such as electricity tariffs and an upward trend in material prices like coking coal, scrap, and iron to continue to exert pressure on margins. The absence of large-scale domestic infrastructure projects is also a bane. This will be added by China’s increasing its supply, leading to a glut condition. All in all, we expect a tough time to persist for Ann Joo given a less-than-favourable operating conditions.

• Forecast. In view of lower-than-expected earnings forecast, we expect a loss assumption of RM88.7mn for FY23F and cut down FY24-25F earnings forecast by 65% and 49.5% respectively after a new assumption on steel bar price as well as margin.

• Maintain a HOLD, TP: RM0.96. Maintain a HOLD call for Ann Joo with lower target price of RM0.96 (RM1.15 previously). Our valuation is based on 20% discount to 5-year forward mean P/BV of 0.6x that is pegged to FY23F BV/share of RM2.00.

Source: BIMB Securities Research - 30 May 2023