Period  2Q13/1H13

Actual vs. Expectations  Ann Joo Resources (“AnnJoo”) reported a better set of earnings whereby its it managed to turn around its 1H13 core earnings to RM22.2m (after stripping off RM11m forex losses) which came in broadly inline with ours but within streets’ estimates, making up 72% and 52% of ours and streets’ estimates, respectively. The positive variance on our forecasts was due to better operating margins as a result of the improvement on its plant efficiency and better cost structure.

Dividends  No dividend was declared, as expected

Key Result Highlights  Improving on 1H13, AnnJoo registered core earnings of RM22.2m (after stripping off the forex losses of RM10.8m) rebounding from a loss of RM8.4m in 1H12 despite the slower sales of RM979.4m (-19%). The improvement in earnings are mainly due to better cost structure measures taken by AnnJoo in order to achieve better efficiency in its plant.

 QoQ, AnnJoo’s core earnings improved marginally by 5% from RM10.8m to RM11.4m as they continued to improve their cost structure by optimizing its feed costs, especially raw materialsi.e. continuously sourcing for cheaper scraps and iron ore in the local market while reducing its usage on coke.

 YoY, AnnJoo’s core earnings declined by 37% from RM18m to Rm11.4m due to slower sales of RM979.4m (-19%) underpinned by the weak market sentiment as buyers had become very cautious in procuring steel due to the fluctuation of steel prices coupled with a higher financing cost of RM14.4m (+106%).

Outlook  Management are still cautiously optimistic on the outlook of the industry due to the uncertainties in the global market, the volatility in foreign exchange rates, and the dependency on China to curb the current oversupply issue. Nonetheless, local demand remains strong due to the on-going mega projects.

Change to Forecasts  No changes to our earnings forecast at this juncture, as we are still cautiously optimistic on the outlook on global steel market which remains challenging due to weak global economic performance.

Rating   Upgrade to MARKET PERFORM

 Given the sharp retracement in share price recently, we are upgrading AnnJoo from UNDERPERFORM to MARKET PERFORM.

Valuation  We are maintaining our target price of RM1.31 based on 0.5x PB ratio to its FY14 BVPS.

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

Source: Kenanga