Ann Joo's FY11 net profit of RM61.7m was spot on with ourestimates but below consensus. The recognition of tax incentives plusprovisions made for diminution in inventories in 3Q helped to compensate forthe meager steel making margins in 4Q. We see a  slow start for 2012 asactual work  on  various mega projects may take  time to kick start and the recovery in steel prices may be delayed. The long gestationfor its newly commissioned blast furnace (BF) and recent share price rally  may have partly priced in the potential surgein steel prices. Thus, we downgrade Ann Joo to a  NEUTRAL, with  our FV  kept  at RM2.16, derived from 0.98x FY12 BV, or-0.5 standard deviation of the stock's historical trading range.

Almost  on  thedot. Thanks to the recognition of tax incentives  which resulted  in a positive tax incomeof RM6.2m, Ann Joo's FY11 net profit came in at RM61.7m, almost spot on  with our projection but below street estimates.  The tax benefit aside, management's decision to make provisions fordiminution in inventory value amounting to RM37.9m in 3Q also  helped to compensate for the sharp erosion in  steel making margins in 4Q.This occured when the sharp plunge in the prices of iron ore, steel scrap andsteel  gave  rise to a negative mismatch  of lower selling prices and still-high raw materialcosts, as there is an inherent time lag before the latter starts to decline.

Near-term outlookchallenging. Although the award of mega projects is gaining pace, it maytake a while for actual works to begin and eventually stoke demand for steel.That said, steel prices have  been  lackluster and  disappoint our earlier expectations of a possible recovery in February. Thus weexpect a slow start for 2012. Also, we suspect Ann Joo may start to expense anyinterest costs incurred for  its  newly commissioned blast furnace (BF). Wealso expect  the company to only enjoylimited conversion cost savings as it relies on expensive importedmetallurgical coke. Meanwhile, management expects its new plant  to take another three months to achieve  efficiency as some ancillaryequipment is on the final stage of installation. On full installation, Ann Joomay be able to fully utilise the electricity and gas generated from the BF,plus inject cheaper PCI coal to meet part of its requirement for expensivecoke.

Downgrade to NEUTRAL.As the stock has put on some 14.4% since our last upgrade, we suspect that themarket may have priced in a potential surge in steel prices. We now anticipate  steel prices to rebound in March, with Chinaexpected to  crank up its constructionactivities as it enters the spring season. As Ann Joo's share price offers limitedupside to our  FV, we  are compelled to downgrade  it toNEUTRAL, with only a marginal tweak in our projection. We value the stock usinga book-based valuation, at -0.5 standard deviation of its historical tradingrange, which is one notch lower than the industry's, as we remain vigilant onthe potentially long gestation period for its BF.