Period  2Q14/1H14

Actual vs. Expectations Ann Joo Resources (Ann Joo)’s 1H14 core net profit* came in at RM27.4m, making up 71% and 66% of our forecast and consensus estimates, respectively.

 We deem the results as within expectations due to the one-off inventory reduction in 1Q14, which is not likely to be repeated over the remainder of the year.

Dividends  No dividend was announced, as expected. For fullyear FY14, we expect a dividend of 4.5 sen of which 2.0 sen has been paid out YTD. This implies a decent 3.4% dividend yield.

Key Result Highlights YoY, 1H14 CNP rose 31% to RM27.5m on improved production efficiency and the abovementioned major inventory reduction. Trading profit rose 69% to RM19.8m on higher margin and aggressive marketing strategies. Manufacturing profit improved 1% to RM17.9m on higher sales volume despite low selling prices.

 QoQ, 2Q14 CNP fell 96% to RM1.0m due to a plant breakdown during the quarter which caused manufacturing division profit to decline 76% to RM3.4m. We gather that the breakdown was caused by an unexpected electrical breakdown which is unlikely to recur.

Outlook  We expect Ann Joo to benefit from the current downtrend of lower raw material costs. In 2Q14,

average iron ore price was USD102/MT (-13% QoQ, -17% YoY), coke price was USD161/MT (-19% QoQ, -32% YoY), and scrap price was USD355/MT (-1% QoQ, -15% YoY). As the only blast furnace operator in Malaysia currently, Ann Joo is able to take advantage of lower iron ore and coke costs to maintain its industry-leading margins.

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

Rating Maintain OUTPERFORM

Ann Joo’s earnings is poised to return to growth phase with expected FY14E-FY15E growth of 6%-28%. Valuation-wise, we believe that Ann Joo is undervalued as it is currently trading at 0.6x PBV which is close to negative 0.5SD on historical PBV.

Valuation  We are upgrading our target price to RM1.47 (from RM1.31 previously) as we upgrade our valuation to 0.68x PBV (from 0.60x previously) and roll over our base year to FY15E. The new PBV reflects Ann Joo’s mean valuation (from -1.0SD previously) due to better earnings outlook.

Risks to Our Call Lower-than-expected steel selling prices

 Higher-than-expected iron ore, coke and scrap costs.

Source: Kenanga