Period

2Q15/1H15

Actual vs. Expectations

1H15 core net profit (CNP) of RM4.5m came in way below expectations, making up only 12% and 13% of our and consensus’ full-year forecasts, respectively. This is after stripping off an unrealised forex loss of RM96k.

The negative variance is mainly attributable to: (i) margin compression from continuous depressed steel pricing, (ii) slowdown in business post-GST implementation, and (iii) higher-than expected inventory written down to net realisable value.

Dividends

None as expected. Key Result

Highlights

QoQ, despite 2Q15 revenue declining slightly by 3.7% to RM501.3m, bottomline weakened drastically to core net loss (CNL) of RM10.9m. This was due to: (i) drastic fall in steel prices that led to lower revenue and margins, (ii) recognition of inventories written down to net realisable value of RM6.8m, and (iii) slowdown in business post-GST implementation.

YoY, 1H15 revenue fell 20.9% to RM1.0b on the back of depressed steel pricing. Meanwhile, 1H15 CNP plunged drastically by 83.7% to RM4.5m, driven by the abovementioned factors.

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 unfavourable commodity market outlook, we opt to tweak down our earnings by 50%-36% in FY15-16E, after we: (i) revise upwards USD/MYR to RM3.83/USD from RM3.53/USD, and (ii) toning down billet and rebar price estimates to RM1,600/MT (-RM100/MT) and RM1,800/T (- RM100/MT), respectively.

Rating

Maintain MARKET PERFORM

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 had dropped 32.1% to below our TP since our downgrade on 13th Feb during our sector update, titled “Steel” Tough.

In view of the sharp plunge in CNP and unfavourable commodity market outlook that is likely to persist in upcoming quarters, we decided to apply a higher discounted valuation to the stock at -1.5SD (-1.0SD previously). However, given that the share price has fallen considerably recently, we believe that the negativity from a gloomy commodity outlook has been priced in. As such, we believe the downside risk is limited at this juncture, hence we maintain our call at MARKET PERFORM.

Tweak our TP downwards to RM0.80 (previously RM1.01), based on FY16E with lower PBV of 0.37x (0.46x previously). The target PBV of 0.37x is based on -1.5SD over 4 years historical Fwd PBV, 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 Aug 2015