1Q19 CNL of RM6.9m came in below expectation. We attribute the earning miss to: (i) lower average selling price, (ii) higher-than-expected raw material cost, and (iii) lower sale tonnage. We slashed our FY19-20E earnings by 87- 85%. Maintain UP with lower TP of RM1.15 based on Fwd. PBV of 0.5x pegged to FY20E BV/Share.

1Q19 below expectations. Ann Joo recorded 1Q19 CNL of RM6.9m which came in below our/consensus expectation. This was mainly due to lower average selling price of rebar steel, higher-than-expected raw material cost and lower sale tonnage. No dividend was announced, as expected.

Results highlight. YoY, 1Q19 swung to a CNL of RM6.9m (vs. CNP of RM57.1m in 1Q18) due to lower ASP for steel rebar and lower sale tonnage as well as higher input cost, which led to lower EBIT margin by 15ppt to 0%. Domestic ASP for rebar steel dropped to RM2,150/MT from 1Q18 of RM2,638/MT mainly caused by oversupply of steel after a foreign steel mill commenced bar production since October 2018, and weaker domestic demand due to mega infrastructure projects being halted by the new Government. On the other hand, raw material costs such as iron ore price continued to increase, mainly led by supply disruption in Brazil. QoQ, 1Q19 poor performance with CNL of RM6.9m was due to similar reasons above.

Outlook. Overall, we remain cautious with its prospects as we expect lower ASP of rebar steel, distressed by oversupply of steel products in domestic market and weaker domestic demand despite the revival of selected megaproject such as ECRL and Bandar Malaysia. In addition, the group has undertaking to reline its blast furnace in June 2019 to drive sustainable production efficiency of the furnace which will further increase the capex requirement in 2Q19. However, we are encouraged by the group’s strategy to actively pursue 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 domestic demand and gain tax incentive from increasing export.

Earnings cut. We slashed our FY19E earnings by 87%, respectively after lowering our steel price assumptions to RM2,100/MT (from RM2,200/MT) while also decreasing utilisation rate to account for lower tonnage sales going forward considering seasonal factor such as the Ramadan month and Raya Festival as well as relining exercise for blast furnace which will take approximately 1 month to complete. As for FY20E earnings, we cut it by 85%, also based on RM2,100/MT steel price assumptions, but with higher utilisation rate as we expect higher construction steel demand pick-up as some mega infrastructure projects progress, and lower import of steel product from overseas country.

Maintain UP with lowered TP of RM1.15 (from RM1.25) based on unchanged Fwd. PBV of 0.5x pegged to FY20E BV/share of RM2.30 as we roll forward valuation base from FY19E, which is at its 5-year - 0.5SD level.

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 - 29 May 2019