Results

Ann Joo reported 1HFY14 core net profit of RM12.0m came in well below expectations, accounted for only 24.2% and 20.1% of ours and consensus estimates, respectively.

Deviations

Lower than expected average selling prices.

Stock adjustment loss of RM7.7m.

Dividends -

None

Highlights

QoQ. 2Q14 revenue decreased by 11.6% to RM606.3mwhile core profit decreased from RM10.3m to RM1.7m. These were mainly due to lower selling prices, recognition of overhead cost for plant breakdown and stock adjustment loss of RM7.7m.

YoY. Despite poor numbers posted in 2Q14, YTD performance recorded drastic improvements as revenue increased by 32.0% from RM979.4m to RM1,292.4m while core net profits increased to RM12.0m from RM3.1m. This is due to higher sales tonnage, improved cost structure and increasing marketing efforts.

Despite confidence shown by the management in 1Q14, outlook remains bleak as the industry is still struggling to compete with the huge influx of artificially cheap Chinese steel products that surged 40% QoQ. Thus, dumping will remained a drag on its performance with no key catalyst(s) to change the sector’s fortunes in the near short term.

However, for FY15, we remain hopeful as MITI is in the midst of reviewing and investigating the possibility of placing an import duty of 25% on import of Wire Rods from Shagang and Yonggang and the decision will only come in late 2014.

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

Earnings estimate for FY14 slashed by 33.7% to reflect the huge influx of artificially cheap steel products that surged 40% QoQ.

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 - 29 Aug 2014