Period  4Q14/FY14

Actual vs. Expectations  ANNJOO registered FY14 core net profit (CNP)* of RM37.4m which came in below expectations, making up 91.0% and 75.1% of consensus and our expectations, respectively. We derived the CNP after we exclude one-off items namely: (i) unrealised forex loss of RM8.2m, (ii) inventory written down and written off of RM7.8m, (iii) reversal of net realisable value of RM4.4m, (iv) PPE written off of RM0.5m, and (v) gain on disposal of PPE of RM0.2m.

 The negative variance is due to: (i) lower-than-expected steel ASP caused by influx of dumped imports, and (ii) recognition of forex losses as a result of weakening MYR against USD.

Dividends  Below expectation. The company declared final single-tier DPS of 1.0 sen. Cumulatively, the group has declared 3.0 sen DPS, lower than our forecast of 4.5 sen.

Key Result Highlights  QoQ, 4Q14 revenue fell by 3.4% to RM491.1m due to lower sales volume and depressed steel ASP, which was affected by continuous influx of dumped imports. As a result, 4Q14 CNP fell significantly by 27.1% to RM4.2m. In fact, manufacturing division turned to operating loss of RM1.1m from RM19.2m due to the aforementioned reasons.

 YoY, FY14 revenue grew by 6.3% on the back of higher sales volume despite depressed steel ASP. Meanwhile, FY14 CNP grew marginally by 2.6% to RM37.4m thanks to lower raw material costs and improvement in productivity. Both manufacturing and trading segments recorded stronger EBIT at RM35.9m (+12.6%) and RM31.6m (+77.4%), respectively, driven by higher billet and steel bars sales tonnage in 1H14.

Outlook  Challenging in the near-medium-term due to the absence of anti-dumping trade actions by the government. We reaffirm our view that the absence of remedies from the government to curb the rising import activities of steel products could lead to: (i) declining local steel players’ market share, and (ii) depressed steel prices.

 We also believe that the booming construction activities in the local market may not help the local steel industry to fully recover if the oversupply situation in major global producers (e.g. China and South Korea) persists.

Change to Forecasts  In view of the challenging environment in steel industry, we opt to be conservative by revising downwards our FY15E earnings by 23.9% to RM40.2m. The adjustments are after adjusting steel price assumption to RM1,900/MT from RM2,100/MT as we do not expect steel price to recover this year. We also introduce FY16E earnings of RM43.2m, implying 7.5% growth.

Rating Downgrade to UNDERPERFORM (from MP)

Valuation  Despite ANNJOO’s efficient blast furnace plant that could benefit from lower coke prices, we remain concerned on the steel industry fundamentals due to the absence of antidumping trade actions by the government. In fact, the impact has started to be felt in 4Q14. Hence, we believe the share price has been running ahead of the group’s fundamentals. Downgrade to UNDERPERFORM from MARKET PERFORM.

 Post-earnings revision, we tweaked lower our TP to RM1.08 from RM1.09. Our valuation is based on unchanged ascribed FY15E PBV of 0.50x. The target PBV of 0.50x reflects ANNJOO’s -1.0SD valuation, in line with the group’s down cycle valuation.

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

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

Source: Kenanga