Ann Joo Resources Berhad (ANNJOO)’s recorded 1H18 CNP of RM84.5m, which came in below both consensus at 44% and our forecast at 46% on weaker-than-expected market demand and segmental division margins. An interim dividend of 6.0 sen was announced, as expected. We lower our FY18-19E CNP by 15-19% to reflect ongoing tepid domestic in 2H18. Maintain OUTPERFORM with lower TP of RM2.35 (from RM2.75) based on unchanged PER of 8.0x.

Below expectations. 1H18 CNP of RM84.5m came in below expectation, making up only 44% of consensus’ RM190.0m and 46% of our RM183.0m. This is due to weaker-than-expected demand that was impacted by the run-up to and post GE14 when the fate of mega infrastructure projects became uncertain. Interim dividend of 6.0 sen was announced, as expected, in line with our expectation. We derived our 1H18 CNP by reversing out unrealized FX loss of RM2.4m.

Results highlight. YoY, 1H18 CNP of RM84.5m was down (-17%) on lower steel ASPs and higher input cost, which led to a decline in EBIT margins by (3ppt) despite stronger revenue performance of (+11%). Recall that included in the 1H17 results was an exceptional strong 1Q17 due to a sudden surge in steel prices arising from the closure of China furnaces while inventory cost lagged. QoQ, 2Q18 CNP slumped (-52%) as EBIT margins decreased by 6ppt to 9% and revenue down by 13% mainly pressured by weaker steel ASPs. 2Q18 rebar steel ASPs dropped 7% to RM2,442/MT (from RM2,638/MT) owing to softer market demand as a result of uncertainties in construction/infrastructure jobs post the new government coupled with the seasonally low demand during Eid period in June 2018, which resulted in lower tonnage sold.

Outlook. Overall, we are cautious for the rest of FY18, as we expect domestic demand to be lacklustre dampened by slowing down of construction/infrastructure projects. All in, we expect steel prices to be on a flattish to declining trend for 2H18 as we believe ongoing uncertainty regarding global trade policies and weak domestic demands to potentially pressuring the prices further. While short-medium-term pressures linger, ANNJOO remains confident that it will be able to weather this downturn by increasing its proportion of export sales amidst tepid domestic demand.

Earnings cut. With expectations of tepid domestic demand due to softer construction/infrastructure jobs, we reduce our FY18-19E earnings by 15-19% after accounting for weaker 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.

Maintain OUTPERFORM with a lowered TP of RM2.35 (from RM2.75) based on unchanged 8.0x FY18E PER post earnings adjustment. 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). We still like ANNJOO in the steel space for being the most efficient and cost effective domestic steel players with current strategic avenues to overseas market.

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

Source: Kenanga Research - 28 Aug 2018