9M18 CNP of RM99.4m came in below consensus at 63%, and our forecast at 64%. No dividend was declared, as expected. We slashed our FY18-19E CNP by 24-17% after accounting for higher input costs. Downgrade to MARKET PERFORM with a lower TP of RM1.25 (from RM2.35) based on lower Fwd. PER of 5.0x pegged to its FY19E PER.

Below expectations. 9M18 CNP of RM99.4m came in below expectations, making up 63% of consensus’ RM158.7m and 64% of our RM155.0m forecasts. The lower-than expected earnings performance was mainly dragged by rising input costs. We derived our 9M18 CNP by excluding one-off arbitration awards of RM25.2m recognised in 3Q18 and reversing out unrealized FX loss of RM8.1m. This is the 2nd consecutive quarterly disappointments by ANNJOO for FY18. No dividend was declared, as expected.

Results highlight. YoY, 9M18 CNP of RM99.4m was down (-34%) on lower tonnage sold, margin erosion triggered by rising cost of scrap metal, coking coal and iron ore, which led to a decline in EBIT margin by (-4ppt) despite higher revenue performance (+4%). QoQ, 3Q18 CNP dropped (-46%) mainly dragged by depressed selling prices and higher cost materials with eroded EBIT margins (-4ppt) to 5% despite revenue increasing by (+7%) on increased tonnage sold. 3Q18 rebar steel ASPs dropped 2% to RM2,400/MT (from RM2,442/MT) owing to softer market demand as a result of the slowdown in construction/infrastructure jobs.

Outlook. Overall, we are cautious for the remainder of FY18, as we expect domestic demand to be dampened by slower flows of construction/infrastructure projects to potentially further pressure steel prices. However, management is confident of weathering the downturn by increasing its proportion of export sales to approximately 30% of its production in 2H18. As for 2019, we opine that domestic demand may pick up in 2H19 in which we have factored in higher volume for FY19 in anticipation of potential recommencement of selected infrastructure projects such as LRT3 and MRT2.

Earnings cut. We slashed our FY18-19E earnings by 24-17% after accounting for higher input costs. Our FY18-19E earnings are based on unchanged rebar price assumptions of RM2,350-2,400 per tonne.

Downgrade to MARKET PERFORM with lower TP of RM1.25 (from OP; TP: RM2.35) based on a lower Fwd. PER of 5.0x pegged to its FY19E PER. Note that our ascribed multiple of 5.0x is lower than 6.0x- 11.0x ascribed to the construction players and it implies a 3-year - 0.5SD levels which we believe to be justified due to the slowdown in construction activities. That aside, we opine that the current operating environment in the steel industry is less challenging compared to its loss-making days back in 2012-2015 as China is cutting back capacity coupled with the safe guard measures in place.

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

Source: Kenanga Research - 03 Dec 2018