Period

1Q15

Actual vs. Expectations

1Q15 core net profit (CNP) of RM15.4m (excluding forex adjustments of RM10.3m) accounts for 42% and 43% of our and consensus’ full-year forecasts.

However, we deem the result as broadly in line with our expectation as we are expecting the group to deliver weaker numbers in upcoming quarters in view of continuous depressed steel pricing.

Dividends

None as expected. Key Result

Highlights

QoQ, 1Q15 revenue rose by 6.0% due to higher sales volume, despite depressed steel ASP. 1Q15 net profit jumped 3-fold to RM15.4m, mainly attributed to higher revenue coupled with lower raw material cost. We gather that the average raw material cost (i.e., iron ore, coke and scrap) fell at a greater scale (-10.3% QoQ, - 22.2% YoY) as compared to average steel ASP (i.e., wire rod, rebar and billet) at -9.8% QoQ, -18.1% YoY.

YoY, 1Q15 revenue fell 24.1% on the back of depressed steel ASP and lower export sales. As a result, manufacturing segment revenue dropped by 28.0%. At the same time, 1Q15 CNP also declined, by 41.7% due to a high base effect. Recall, there was major clearance of existing inventory in 3M14, which we view as a one-off event that is unlikely to recur.

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

Unchanged.

Rating

Upgrade to MARKET PERFORM (from UNDERPERFORM) 6

Valuation

We remain concerned on the steel industry fundamentals due to the absence of anti-dumping trade actions by the government. In fact, the impact has started to be felt since 4Q14. ANNJOO’s share price dropped 6.4% to below our TP since our downgrade on 13th Feb during our sector update, titled “Steel” Tough. As we have already applied a discounted valuation to the stock (-1.0SD valuation, i.e. in tandem with downcycle period), we believe the downside risk is limited at this juncture, hence upgrade to MARKET PERFORM from UNDERPERFORM.

Tweak our TP slightly to RM1.09 (previously RM1.08), as we roll forward our valuation basis to FY16E with unchanged PBV of 0.50x. The target PBV of 0.50x is in line with the group’s down cycle valuation.

Risks to Our Call

Lower-than-expected steel selling prices

Softer-than-expected steel demand

Higher-than-expected raw material costs

Source: Kenanga Research - 28 May 2015