Period

3Q15/9M15

Actual vs. Expectations

9M15 registered core net loss (CNL) of RM70.0m, which came in way below our and consensus profit expectations of RM15.7m and RM15.4m, respectively. This is after stripping off an unrealised forex loss of RM7.9k.

The negative variance is mainly attributable to: (i) sharp drop in steel average selling price (ASP), (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, 3Q15 revenue declined by 35.1% to RM325.5m while bottomline plunged drastically by 7x to CNL of RM74.4m. This was due to: (i) sharp fall in steel ASP and reduction in sales volume that led to lower revenue and margins, (ii) higher recognition of inventories written down to net realisable value of RM51.8m (from RM6.8m in 2Q15), and (iii) impact from slowdown in business post-GST implementation.

YoY, 9M15 revenue fell 25.2% to RM1.3b on the back of depressed steel pricing and lower sales volume. Meanwhile, 9M15 worsen from core net profit of RM33.2m in 9M14 to CNL of RM70.0m, 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 reduce our FY15E earnings to CNL of RM108.9m and FY16E earnings to core net profit of RM6.3m, after we: (i) revise upwards USD/MYR to RM4.00/USD from RM3.83/USD, (ii) toning down rebar price estimates to RM1,600/T (- RM200/MT), and (iii) toning down billet production utilisation in anticipation of weaker demand in the market.

Rating

Downgrade to UNDERPERFORM (from 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 started to be felt since 4Q14. ANNJOO’s share price had dropped 32.1% below our TP since our downgrade on 13th Feb during our sector update, titled “Steel” Tough.

In view of the sharp plunge in bottomline 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 -2.0SD (-1.5SD previously).

We tweak our TP downwards to RM0.61 (previously RM0.80), based on FY16E with lower PBV of 0.30x (0.37x previously). The target PBV of 0.30x is based on -2.0SD over 4-year’s historical Fwd PBV, in line with the group’s down cycle valuation. We believe our valuation is justifiable, given that this is the second consecutive quarter disappointment in earnings. Hence, we downgrade ANNJOO to UNDERPERFORM from MARKET PERFORM.

Risks

Lower-than-expected steel selling prices

Softer-than-expected steel demand

Higher-than-expected raw material costs

Source: Kenanga Research - 27 Nov 2015