Ann Joo’s 2Q19 core net loss of -RM12.9m (1Q19: loss -RM10.4m, 2Q18: profit RM29.8m), brought 1H19 core loss to -RM17.7m (1H18: RM89.5m). The core loss in 1H19 disappointed vs our full year and consensus profit forecast of RM90.5m and RM40m respectively. Results QoQ and YoY was hit by higher raw materials prices amidst improved earnings on the back of export sales. We cut our earnings estimates FY19-21 to take into account of escalating global iron ore price has surpassed USD112/MT and lower ASP for its products. We shifted our valuation methodology from P/E to P/B as we feel the former is no longer justified under such a challenging earnings delivery environment. Maintain SELL, TP of RM1.04 based on 0.4x FY19 P/B (-1SD).

Results disappoint. Ann Joo’s 2Q19 core loss of -RM12.9m (1Q19: loss -RM10.4m, 2Q18: profit RM29.8m), brought 1H19 core loss to -RM17.7m (1H18: RM89.5m). The core loss in 1H19 disappointed vs our full year and consensus profit forecast of RM90.5m and RM40m respectively. The earnings disappointment was due mainly to (i) lower ASP (ii) escalating raw materials prices e.g iron ore. Our earnings are adjusted for inventories write down of RM22m and impairment of receivables of RM2m. No dividend was declared as expected.

QoQ. 2Q19 revenue improved to RM574m (6.7%) as Ann Joo shifted its sales into more export market amidst the seasonality low demand and tepid construction activities. Nevertheless, core loss widened to -RM12.9m (from -RM10.4m) given higher raw material price.

YoY. Despite higher revenue by 12.7% on the back of higher export sales volume, Ann Joo turn to losses (-RM12.9m) from RM29.8m profit in 2Q18, mainly on the back of higher raw materials prices. Note that Ann Joo undertook scheduled maintenance for blast furnace facilities; this forced Ann Joo to use more fuel based to produce steel.

YTD. The culprit for the 1H19 core losses of -RM17.7m (vs core profit of RM89.5m in 1H18) was higher raw materials prices, namely iron ore that on average traded on USD109/MT vs USD75/MT in 1H18.

Outlook. We see no immediate catalyst for Ann Joo despite the impending revival of construction jobs. In addition, the sector continues to be clouded from overcapacity by a new steel player, making the steel prices difficult to recover. We believe the improvement would only be felt gradually by 1H20 premised on the pick-up in construction activities.

Forecast. In view of iron ore price that surpassed USD112/MT in 2Q19 and weak ASP for its products, we lower our earnings estimates by 95%/85% and 83% in FY19/FY20 and FY21.

Maintain SELL, TP: RM1.04. In view of Ann Joo’s challenging earnings delivery, we of the view that P/E methodology is no longer justified. TP is based on FY19 BV of RM2.61 pegged at 0.4x P/B (-1SD below long term mean). Ann Joo continues to be hit from higher raw materials and weak ASP for both bars and billet.

Source: Hong Leong Investment Bank Research - 29 Aug 2019