Period  1Q14

Actual vs. Expectations Ann Joo Resources (Ann Joo)’s 1Q14 core net profit* came in at RM26.4m which translates to 68.6% of our fullyear forecast and 63.8% of consensus estimates, respectively.

 We deem this as within expectations as the strong performance was mainly due to major clearance of existing inventory. We view this as a one-off event which is not likely to be repeated over the remainder of the year

Dividends  Unexpectedly, a first interim single-tier dividend of 2 sen was declared with ex-date on 10 June 2014. This is a positive surprise and implies that the Company expects sustainable cash flows and a more stable operating environment going forward. The payout is consistent with the Company’s dividend policy targeting 60% of net profit as a gross dividend.

 On this basis, we revise our FY14E and FY15E dividends outlook to 4.5 sen based on a targeted dividend payout of 60%, which is equivalent to a decent dividend yield of 4.2%.

Key Result Highlights YoY, 1Q14 manufacturing profit improved 123% to RM14.5m on improved sales volume despite largely flat prices. The Company also saw an improvement in operating margin from 1.3% to 2.1% on better cost efficiencies arising from its blast furnace-based production method. Trading profit improved 12% to RM9.8m on aggressive business expansion.

 QoQ, CNP improved 141% to RM26.4m due to improved sales, which increased 7% to RM686.1m. As mentioned previously there was a heavy inventory drawdown during 1Q14. Additionally, interest expense was lower by 8% to RM13.8m.

Outlook  While we do not expect a repeat of the strong 1Q performance due to the above-mentioned major inventory clearance, we expect to see sustained sales demand from the growing construction sector.

 Globally, we believe depressed steel prices are unlikely to be resolved in the near-term, although the possibility of trade actions by the Malaysian government against dumping activities bodes well for the sector.

 Cost-wise, while coke and iron ore prices have been on the downtrend in 1Q14, management expects prices to normalize, which may limit margin expansion.

Change to Forecasts    Maintain FY14E-FY15E CNP of RM38.5m to RM49.4m

Rating Maintain OUTPERFORM

We maintain our view that the sell-down on Ann Joo is excessive and valuations remains attractive at 0.53 PBV, which is close to -1.3SD on its 5-year historical PBV.

Valuation  We are maintaining our target price of RM1.31 based on 0.6x PB ratio to its FY14 BVPS. This reflects a -1.0SD discount over 5-year historical Fwd PBR which accounts for the lacklustre near-term outlook on steel prices.

Risks to Our Call  Volatile scrap prices and a slower-than-expected global demand.

Source: Kenanga