FY18 core earnings of RM156.3m (-20.7% YoY) came in above our and consensus estimates at 136.8% and 126.8% respectively. The result was mixed with weaker ASP and margin compression which was offset by higher export volume and tax allowances. We expect earnings to recover in line with the recovery in the local demand, led by the revival of high profile projects and further action by government to curb the oversupply situation. Maintain HOLD, with a higher TP of RM1.53 to reflect the revision in our earnings forecast.

Above expectations. FY18 core earnings of RM156.3m (-20.7% YoY) came in above expectations at 126.8-136.8% of our and consensus estimates, respectively. The 36.7% shrinkage in PBT (at RM156.2m in FY18) was more than offset by tax write back (arising from tax allowance for blast furnace invested, which commenced operation in 2011 and export tax allowance).

Dividend. Announced 2nd interim DPS of 6 sen, bringing FY18 DPS to 12 sen,

QoQ. Revenue grew 23.4% to RM675.7m (from RM547.7m in 3Q18) mainly due to the higher export volume. Core earnings more than tripled to RM54.3m in 4Q18 (from RM12.5m in 3Q18), as weaker PBT (arising from lower ASP, higher raw material costs and RM15.1m allowance for allowance for inventory write down) was more than mitigated by RM32.3m tax write back.

YoY. Group revenue was higher by 10.7% driven by higher export volume which offset the weaker domestic steel prices. Core earnings were higher by 23%, as margin compression arising from lower steel prices, higher raw material costs, and RM15.1m allowance for inventory write down were more than offset by tax write back.

YTD. Revenue improved by 5.8% to RM2.3bn premised on higher selling prices experienced in 1H18 and higher export volume, which more than mitigated subdued demand in the domestic market. However, core earnings dipped by -20.8%, as higher top line and tax write back in 4Q18 were more than offset by weaker margins (arising from RM21.4m allowance of inventory write down and tighter margins for finished steel products).

Outlook. We continue to see subdued demand prospects for long steel product segment, arising from the scale back of major infrastructure projects since last year and increased capacity within the long steel product segment. We understand that Ann Joo is in continuous discussion with the government to overcome the oversupply situations. Should current environment prolong, this will likely result in profitability of domestic long steel producers’ profitability being compressed further.

Forecast. We raise our FY19-20 core earnings by 25% and 13%, mainly to account for tax allowance related to its blast furnace project.

Maintain HOLD, with a higher TP: RM1.53 (from RM1.44). Our TP of RM1.53 is based on 8x FY19 EPS. We maintain our HOLD recommendation.

Source: Hong Leong Investment Bank Research - 27 Feb 2019