FY18 CNP of RM126.5m came in within consensus’ expectation at 102% of RM123.6m but above our RM118m forecast at 107%. A second interim dividend of 6.0 sen was announced, bringing full-year DPS to 12.0 sen, above our 6.0 sen estimate. We slashed our FY19E earnings by 34% and introduce FY20E earnings of RM93m. Downgrade to UP (from MP) with unchanged TP of RM1.25 based on Fwd. PBV of 0.5x pegged to FY19E BV/Share.

FY18 within expectations. FY18 CNP of RM126.5m came in within consensus expectations at 102% of RM123.6m but above our RM118m forecast at 107%. We derived our FY18 CNP by excluding one-off arbitration award of RM25.2m recognised in 3Q18 and reversing out unrealised FX loss of RM2.2m. A second interim dividend of 6.0 sen was announced, a positive surprise in comparison to management’s guidance previously during 3Q18 analysts’ briefing on potential cut of dividend pay-out policy from 60% to 40-45%. Full-year DPS of 12.0 sen is above our expected 6.0 sen which implies 7.9% dividend yield and 51% pay-out ratio.

Results highlight. YoY, FY18 CNP of RM126.5m was down (-39%) on lower steel ASPs and higher input cost, which led to EBIT margin erosion by (-6ppt) despite stronger revenue performance of (+6%). Recall that included in the FY17 results was exceptionally strong 1Q17 due to a sudden surge in steel prices following the closure of China furnaces while inventory cost lagged. QoQ, 4Q18 CNP increased (+82%) to RM27.1m largely driven by positive tax of RM32.3m arising from tax incentives. The group recorded operating losses of RM0.3m (vs. RM28.7m in 3Q18) dragged by depressed ASPs despite revenue increasing (+23%) on higher export tonnage sold. 4Q18 rebar steel ASP dropped 4% to RM2,294/MT (from RM2,400/MT in 3Q18) owing to softer market demand as a result of the slowdown in infrastructure jobs.

Outlook. Overall, we remain cautious with its prospects as we expect soft domestic demand to continue plaguing the industry. However, we are encouraged by the group strategy to actively pursuing export opportunities, leveraging on its operational flexibility to attain cost competitiveness. We think its exports proposition may help in cushioning the negative impact from slower demand. To recap, the group has exported approximately more than 20% of production in 2018. In addition, domestic demand may pick up in 2H19 in which we have factored in higher volume for FY19 in anticipation of potential recommencement and revival of selected infrastructure projects such as LRT3, MRT2 and ECRL.

Earnings cut. We slashed our FY19E earnings by 34% after lowering our steel price assumptions to RM2,200/MT (from RM2,400/MT) while also increasing utilisation rate to account for higher tonnage sold going forward. We introduce our FY20E earnings of RM93m which also based on RM2,200/MT steel price assumptions.

Downgrade to UP (from MP) with unchanged TP of RM1.25 based on Fwd. PBV of 0.5x pegged to FY19E BV/share of RM2.54, which is at its 5-year -0.5SD levels. We switched our valuation to PBV in anticipation of higher earnings volatility in the near and medium term. While we opine the current operating environment is challenging for the steel industry, we believe ANNJOO’s earnings risks and prospects are less susceptible compared to 2015 as China is cutting back capacity coupled with safe-guard measures in place.

Source: Kenanga Research - 27 Feb 2019