Period  2Q14/1H14

Actual vs. Expectations Ann Joo Resources (Ann Joo) registered 9M14 core net profit (CNP)* of RM33.2m which made up 90% and 86% of consensus and our expectations, respectively.

 We deem the results as above expectations. Raw material prices had declined more than expected while ASP for steel products declined at a lower rate. This has resulted in higher-than-expected margins at 4.3% against our expectation of 4.0%.

Dividends  No dividend was announced, as expected. For full-year FY14, we expect a dividend of 4.5 sen, of which 2.0 sen have been paid out YTD. This implies a decent 3.9% dividend yield.

Key Result Highlights YoY, 9M14 CNP grew 28% to RM33.2m on higher sales volume despite depressed steel average selling prices (ASP). Operating margins improved from 2.2% to 4.3% due to improved productivity in iron, steel and rolling processes. Both manufacturing and trading segments saw improved operating profit to RM37.0m (+216%) and RM28.2m (+190%), respectively. This was due to higher sales tonnage, which led to improved economies of scale, thus offsetting the overall ASP decline caused by rising Chinese steel imports.

 QoQ, 3Q14 CNP rose 5.6x to RM5.8m mainly due to the manufacturing division which restored productivity after a one-off electrical breakdown in 2Q14. Manufacturing segment results improved 5.6x to RM19.2m due to the abovementioned factors.

Outlook  We observe that overall raw material costs have fallen at a greater pace than global steel ASP. As of 3Q14, average iron ore price was USD114/MT (-12% QoQ, -15% YoY), coke price was USD159/MT (-6% QoQ, -30% YoY), and scrap price was USD349/MT (-1% QoQ, -17% YoY). Meanwhile, average steel product (wire rods, rebar and billet) ASPs declined by -1% QoQ and -3% YoY in 3Q14. Hence, we expect Ann Joo to take advantage of lower iron ore and coke costs to maintain its industry-leading margins.

Change to Forecasts Increase FY14E-FY15E CNP by 7% each to RM41.1m-RM52.8m. Despite decreasing our FY14 average rebar ASP to RM2,000 (from RM2,100 previously) to account for depressed prices arising from rising imports of Chinese steel, we have revised our FY14E raw materials assumptions to reflect lower coke, iron ore and scrap prices. Impact to our FY14-15E BV/share is not material given its wide base.

Rating Maintain OUTPERFORM

Ann Joo’s earnings are poised to return to growth phase with expected FY14E-FY15E growth of 13%-28%. Valuation-wise, we believe that Ann Joo is undervalued as it is currently trading at 0.53x PBV which is close to -1.0SD on historical PBV which is unjustified considering their earnings improvements.

Valuation  We maintain our TP of RM1.47 based on 0.68x PBV to FY15E BV/sh of RM2.17. Our target PBV of 0.68x reflects Ann Joo’s mean valuation justified by its efficient blast furnace production method which also positions the company to benefit from lower iron ore and coke prices.

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

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

Source: Kenanga