Despite 1Q18 earnings coming within expectations at 26%, we believe the recent change in government may see delays/deferment in construction projects, dampening the demand for steel products. Hence we decide to trim our FY18/19E earnings estimates by 20%/21% after accounting for slower market demand ahead. Maintaining OP with a lowered TP of RM2.75 while the current share price levels offer attractive yield of c.6.8%.

Within expectations. 1Q18 CNP of RM61.4m is within our/consensus forecasts of RM228m accounting for 26% of full-year estimates. No dividends declared as expected.

Results highlight. 1Q18 CNP was up 11% QoQ despite the lower revenue (-3%) from lower sales tonnage as EBITDA margin improved (+4ppt) from better steel ASPs (+9%; RM2711 vs RM2492). We highlight that net gearing continued to improve, to 0.58x from 0.64x in 4Q17. 1Q18 CNP was down 17% YoY despite revenue being higher (+18%) as EBITDA margin was weaker (-8ppt) as the spread between steel ASPs and raw material prices (scrap, coke, iron ore) were wider in 1Q17. Recall that the wider margins registered in 1Q17 was due to the sudden surge in steel prices from spiked demand while costs lagged.

Short-term pain, long-term gain. With a new government in power, our earlier expectation of jobs picking up post election is no longer valid. As major infrastructure projects (i.e. ECRL) gets reviewed while pending the new PH government to firm up its policy on infrastructure developments, the least we can expect is for on-going and yet-to-be awarded construction jobs to be delayed.

That said, we see a silver lining amidst this uncertain period. Given that our new government are strong advocates of ‘Buy Malaysian’ products, we think that local steel players stand to benefit and be safeguarded from imports/foreign steel in the long term. As a start, we believe the new PH government would call for further transparency over the operations and local/export sales ratio at the recently commenced Alliance steel (China-owned) plant based in Kuantan. In addition, we think that the PH government will exercise their muscles to ensure Alliance Steel does not breach their allowable local/export sales ratio mandate which is currently unknown to the public. In our view, development in these areas would serve as a positive catalyst for the local steel sector.

Trimming estimates to accommodate the lull. With expectations of softer construction activities post change in government, we reduce our FY18-19E earnings down by 20-21% after accounting for slower steel demand on lower plant utilisation. Our FY18-19E earnings are based on an unchanged rebar price assumption of RM2,350/2,400 per ton.

Maintaining OP with a lowered TP of RM2.75 (from RM3.45) based on unchanged 8.0x FY18E PER after the adjustment in earnings. We think our OP call is fair as we find ANNJOO’s valuations appealing at this juncture backed by a strengthening balance sheet and attractive FY18E dividend yields of 6.8%. We find our applied valuations of 8.0x justifiable and undemanding given that it is at the lower end of its peer MASTEEL’s FY10-12 PER of 7-10x (stable times prior to China’s dumping in FY15) despite ANNJOO’s current position as the most cost efficient upstream steel player in Malaysia coupled with subsided dumping concerns from China.

Risks to call include: (i) lower-than-expected steel prices, (ii) lower-than expected steel demand, and (iii) higher-than-expected raw mat costs.

Source: Kenanga Research - 28 May 2018