Results

1QFY14 core net profit of RM10.3m (yoy: +32.6%; qoq; - 33.6%) accounted for 20.8-24.8% of our and consensus fullyear forecasts. We consider the results were in line with our expectation, as we expect stronger quarters ahead (underpinned by the absence of hefty inventory writedown in the near future).

Deviations

None

Dividends 

Declared interim DPS of 2 sen/share (ex date: 12 June 2014; payment date: 30 June 2014).

Highlights

YoY… Although steel prices remained depressed (witnessed by an RM18.6m inventory writedown at the manufacturing division), 1QFY14 core net profit jumped by 32.6% to RM10.3m, thanks to: (1) lower raw material and energy cost at the blast furnace, which in turn resulted in further improvement in the manufacturing division’s overall cost structure; and (2) higher sales tonnage. We note that net debt has declined to RM1.5bn (from RM1.7bn a year ago) and this was mainly due to management’s ongoing efforts in reducing its inventory exposure.

Despite overall outlook for the sector remains challenging (on the back of overcapacity concerns), management has turned more upbeat on the sector, as it is in good position to compete for a larger size of the pie, given its mini blast furmace’s cost competitive edge against its peers (less reliant on electricity and natural gas, which costs have increased further since Jan 2014).

Cost advantage aside, the imposition of import licensing for alloy steel wire rods (since Jan 2014) will curb imports of cheap wire rods from China, hence easing price pressure of wire rods in the domestic market. The local steel millers (including Ann Joo) are also joining efforts to appeal for trade actions against the dumping of steel bars by Chinese mills in the local market, and this is expected to stabilize steel bar prices in the local market, once trade action is imposed.

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

Maintained.

Rating

Sell

Negatives: (1) Volatile and subdued steel prices; and (2) Overcapacity in the region.

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

Valuation

Maintain TP of RM0.97, based on unchanged 9x FY15 EPS of 10.8 sen. Maintain Sell.

Source: Hong Leong Investment Bank Research - 27 May 2014