Results

9M13 core net profit of RM19.1m came below expectations, accounted for only 36.5% and 57.1% of consensus and our full-year forecasts respectively.

Deviations

Weaker-than-expected sales volume arising from festive season in the local market and monsoon season in Southern China and its neighboring countries. Dividends

None

Highlights

QoQ. Despite revenue remained flattish, 3Q13 performance turned into a core net loss of RM0.6m mainly on the back of: (1) Margin squeeze arising from the company’s aggressive marketing strategy in an attempt to reduce inventory holding; (2) Higher realised exchange loss of RM5.5m (vs RM1.4m in the previous quarter); and (3) Higher interest costs.

YTD. Despite revenue declining by 12.4% to RM1.48m (on weak market conditions that have in turn resulted in weak steel prices), 9M13 turned around, with a core net profit of RM19.1m (Vs. a core net loss of RM21.9m last year). This was due mainly to improved cost structure and the absence of lumpy inventory writedown (recall, Ann Joo recorded RM57.8m inventory writedowm last year).

We are keeping our cautious view on the steel sector’s fortunes, as: (1) High iron ore prices (which was spurred by restocking activities in China) will continue to compress Ann Joo’s profitability; (2) Overcapacity issues will continue to drag on the sector’s earnings prospects; and (3) It remains to be seen if the recent new measures by the Chinese government are effective to curb overcapacity issue in China.

Risks

• Downside risks-
• Overcapacity in China remains over the longer term; and
• Volatile input prices, making the sector a play on short-term potential price trend.

Forecasts

We are cutting 2013-2015 net profit forecasts by 14.8- 17.5%, largely to reflect slightly lower selling price assumptions.

Rating

HOLD

Negatives: Volatile and subdued steel prices.

Positives: (1) Likely to be the first to benefit at times of steel prices upswing, thanks to its aggressive procurement strategy; and (2) Move to enhance its value chain by investing into a mini blast furnace.

Valuation

Post downward earnings revision, out TP on Ann Joo has been cut by 18% to RM1.00 (from RM1.22). Maintain Hold.

Source: Hong Leong Investment Bank Research - 29 Nov 2013