ANNJOO’s 9M16 CNP of RM97.5m came in within our and consensus expectations at 78% and 75%, respectively. No dividends were declared as expected. We make no changes to our FY16-17E earnings estimates. Post results, we reiterate our OUTPERFORM rating with an unchanged TP of RM2.24 based on 7.0x FY17 PER.

Within expectations. 9M16 CNP of RM97.5m came in within expectations, accounting for 78% and 75% of our and consensus estimates, respectively. As expected, no dividends were declared this quarter.

Results Highlights. 3Q16 CNP of RM25.1 was down 72.3% QoQ on the back of: (i) decrease in revenue by 44.6% due to lower ASPs and lower tonnage from softer demand, and (ii) a higher effective tax rate (+39.1ppt). 9M16 CNP of RM97.5m improved by 18-fold YoY underpinned by: (i) lower financing costs (-25.4%), and (ii) improvement in manufacturing and trading margins by 17.4ppt and 5.6ppt, respectively due to the absence of Chinese steel dumping, which had severely impacted FY15 performance. Balance sheet wise, ANNJOO’s 9M16 net gearing of 0.8x improved vis-à-vis 9M15’s 1.4x; current gearing levels is also within management’s comfort level of <1.0x.

Steel outlook. In the local scene, steel demand is currently slightly weak due to major construction projects at initial construction phases while some are facing technical delays, i.e. KL118, MRT2. We are expecting demand to pick up in FY17 when these projects progress to more advanced stages. Meanwhile in China, steel bar prices are on an uptrend and trading at USD400-440 levels due to capacity cuts and rising raw material prices (coke, scrap and iron ore), coupled with the recently implemented safeguard measures of 13% for bars and wire rods. We reiterate our positive stance on the local steel sector as we believe imports from China will be limited, providing stability for local steel prices. While rising raw material prices could be a concern for local manufacturers, we believe the limited Chinese imports will provide local manufacturers the ability to raise prices to negate the effects and protect margins.

Earnings estimates unchanged. We make no changes to our FY16-17E forecasts on the back of unchanged steel bar ASPs of RM1,750/t and RM1,890/t for FY16 and FY17, respectively.

Maintain OUTPERFORM. Post results, we reiterate our OUTPERFORM rating with an unchanged TP of RM2.24 based on 7.0x FY17 PER. We feel our valuation is fair as we had conservatively pegged it to MASTEEL’s FY10-12 Fwd. PER of 7-10x when earnings were relatively stable due to less fluctuation in steel prices before the Chinese steel dumping incidences. Risks include lower-than-expected steel selling prices, softer-thanexpec

Source: Kenanga Research - 18 Nov 2016