Period     1QFY13 / 3MFY13

Actual vs. Expectations    Below ours and the consensus expectations. 

For 1QFY13, the company reported a core net profit of RM7.8m, making up 17% and 16% ours and the street’s FY13 full-year estimates, respectively. This is mainly due to a higher than expected financing cost.

Dividends    No dividend was declared, as expected.

Key Result Highlights    QoQ, although Ann Joo posted an increase in revenue (+23%), it only recorded a marginal improvement on its 1Q13 core earnings by 2% from RM7.6m to RM7.8m. The improvement fairly small mainly due to the reversal of allowance inventories written down to net realisable value was smaller at RM7.5m (previously, RM34.4m).

YoY, its net profit grew 70% to RM7.8m despite a 20% decrease in revenue. The higher profitability was due to better cost structure and efficiency on its production line coupled with a lower absorption cost for its new blast furnace. The slower sales were mainly attributed to the decrease in its export sales tonnage as demand continued to be affected by the concerns on the economic slowdown in China despite resilient domestic sales.

Outlook    The global industry uncertainties remain as the main challenge for Ann Joo as the global steel as we expect that industry growth is still muted by demand growth from China. 

Nonetheless, the domestic steel demand will be supported by the execution of sizeable projects and hence, we reckon that there will be spillover demand from potential projects such as MRT, the Manjung expansion as well as the Iskandar project in Johor Bahru, would keep Ann Joo in profitability.

Change to Forecasts     We further reduced our FY13-14 earnings estimate by 32% and 26% respectively as we further factor in a higher financing cost.

Rating    Maintain UNDERPERFORM

Valuation     Raised our TP to RM1.31 rolled forward our valuation base to FY14 based on 0.5x PB ratio to its FY14 BVPS (previously, RM1.17 based on 0.5x PB ratio to its FY13 BVPS).

Risks    Volatile scrap prices and a slower than expected global demand.

Source: Kenanga