Results

• FY14 core net profit of RM30.7m were well below expectations, accounted 73.7% and 61.6% of our and consensus estimates, respectively.

Deviations

• Lower than expected sales tonnage, additional write down of raw materials of RM5.5m and one off payroll expenses of RM5.5m.

Dividends

• -

Highlights

• QoQ. Revenue decreased by 3% to RM491.1m from RM508.5m (on lower average selling price and a lower tonnage sold) while 4QFY14 core net profit decreased to RM0.6m from RM19.8m in 3QFY14. The sharp decline in core net profit was due mainly to: (1) lower sales tonnage; (2) additional write down of raw materials of RM5.5m; and (3) a one-off payroll expense of RM5.5m arising from collective agreement with the worker’s union. Excluding one-off payroll expense, additional write down of raw materials, core net profit declined by 41.4% to RM11.6m.

• YTD. FY14 revenue increased by 8.2% to RM2.3bn from RM2.1bn (due to higher sales tonnage). Core net profit jumped to RM30.7m (from RM1.3m in FY13) on the back of productivity improvement and lower raw material cost.

• Despite demand from the domestic market will likely remain strong in FY15 and the Chinese government’s recent move to remove export rebate for boron-added alloy steel products, management believes that persistent dumping of cheap steel products from China will likely continue, which will in turn hurt profitability of domestic steel players (including Ann Joo).

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

• FY15 and 16 earnings forecasts cut by 44.5% and 2.5% to reflect the gloomy outlook.

Rating

• Sell

Negatives

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

Positives

• (1) Likely to be the first to benefit during times ofsteel prices upswing; and (2) Move to enhance its value chain by investing into a mini blast furnace.

Valuation

• We downgrade TP to RM0.98 from RM1.00 previously, based on unchanged 9x revised FY16 EPS of 10.9 sen. Maintain SELL recommendation on the stock.
• We are keeping to our less-than-positive view on the domestic steel sector’s earnings outlook, given the persistent overcapacity issue in the region.

Source: Hong Leong Investment Bank Research - 27 Feb 2015