Ann Joo Resources Berhad (Ann Joo) 2QFY23 core LATAMI of RM20.9mn narrowed QoQ from a core LATAMI of RM31.1mn but larger than core LATAMI of RM0.6mn same period a year ago. Overall, the result was below our in-house and consensus estimate. We expect the negative outlook to persist in the steel market throughout FY23, driven by lackluster domestic demand, unfavourable supply-demand factors originating from China, and the challenging global economic circumstances. Downgraded to a SELL call for Ann Joo, with a lower TP of RM0.84.

• Below expectations. 1HFY23 core LATAMI of RM52.1mn lagged both our inhouse and consensus’ estimates. It was primarily dented by massive decline in average selling prices (ASP) as well as weaker sales tonnage.

• QoQ. Revenue declined by 11.5% QoQ resulted from subdued sales tonnage as well as lower ASP of steel products. Margin wise however, PBT margin improved 3.9 ppts QoQ, thanks to lower raw material prices and fuel costs. We estimate that prices for iron ore, scrap, and coking coal has declined by 11% QoQ, 8% QoQ and 29% QoQ respectively.

• YoY. On the same note, revenue slumped by 26.3% YoY whereas PBT margin slipped by 5.1 ppts YoY, no thanks to lower ASP and exports tonnage. It was observed that steel prices remained subdued due to a delayed recovery in steel demand, coupled with excessive production from Chinese steel manufacturers.

• YTD. As for 1HFY23, revenue tumbled 14.5% YoY which caused the company to fell into losses with LBT of RM44mn (vs PBT RM71.9mn in 1HFY22). Revenue and earnings were impacted by lower exports sales and ASP. The sluggish demand was attributed to the lack of large-scale projects in the local market and the subdued expansion of China's real estate industry, which significantly impacted the Group's overall performance.

• Outlook. We anticipate the bearish sentiment to continue lingering in the steel market for the remaining FY23 due to dull domestic demand, a lessthan-favourable supply-demand dynamics from China, as well as challenging global economic conditions. Higher operating costs, such as electricity tariffs to continue to exert pressure on margins despite marginal decline in raw material prices like coking coal, scrap, and iron. 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 and therefore imbalance in supply-demand dynamics. All in all, we expect a tough time to persist for Ann Joo given a less-than-favourable operating conditions.

• Forecast. In view of challenging business environment, we widened FY23F loss assumption from RM88.7mn to RM103.7mn and cut down FY24-25F earnings forecast by 65% and 49.5% to RM22.1-42.7mn respectively after adjusting steel bar price as well as margin assumption.

• Downgraded to SELL, TP: RM0.84. Downgraded to a SELL call from a HOLD call for Ann Joo with lower TP of RM0.84 (RM0.96 previously). Our valuation is now based on 30% discount to 5-year forward mean P/BV of 0.6x that is pegged to FY24F BV/share of RM2.00.

Source: BIMB Securities Research - 30 Aug 2023