Ann Joo’s 1Q19 core net loss of -RM10.4m (against profit of RM59.7m) came in below ours and consensus expectations. Needless to say, 1Q19 results were weaker both QoQ (lower revenue) and YoY (lower sales volume, lower selling prices and high iron ore cost). We cut our earnings estimates by 12-13% in FY19-20 to take into account of escalating global iron ore price has surpassed USD100/MT. Maintain SELL, with lower TP of RM1.12 based on 8x FY19 fully diluted EPS of 14 sen.

Results disappoint. Ann Joo’s 1Q19 core net loss of -RM10.4m (against profit of RM59.7m in 1Q18) came in below expectation of our and consensus estimates, respectively. The earnings disappointment was due mainly to (i) lower-than-expected selling prices for key products (ii) prolonged oversupply situation in the steel market.

QoQ. 1Q19 revenue fell to RM538m (-23.4%) mainly due to lower sales volume, depressed selling price in domestic market and higher production cost (arising from high iron ore cost), but partly cushioned by higher export volume. The lower revenue resulted to a core net loss of -RM10.4m (against a core net profit of RM54.3m in 4Q18) on the back of lower margin.

YoY. 1Q19 performance turned to a core net loss of -RM10.4m, mainly on the back of lower sales volume, lower selling prices and high iron ore cost.

Outlook. Despite the recent news on revival of mega infrastructure projects, we see no immediate catalyst for the sector. We believe the improvement would only be felt towards end-2019 at earliest. Nevertheless, current improvement in domestic steel prices is only temporary as this is merely driven by cost-push factors (as iron ore price has increased by 40% since early Jan).

Forecast. In view escalating global iron ore price YTD, we believe Ann Joo’s operating cost will be affected. We slashed our earnings estimates by 12-13% in FY19-20 to take into account of escalating global iron ore price that currently surpassed USD100/MT. We take this opportunity to introduce FY21 earnings forecast.

Maintain SELL, with lower TP of RM1.12 based on 8x FY19 fully diluted EPS of 14 sen. Despite the recent improvement in construction sector sentiment, we of the view that Ann Joo’s outlook will be clouded by higher raw materials price and thus, earnings delivery is poised to be on a weaker trend due to margin erosion.

Source: Hong Leong Investment Bank Research - 29 May 2019