FY19 CNL of RM128.0m came in below expectations. We attribute the earning miss to: (i) lower average selling price, and (ii) higher-than-expected raw material costs. We maintain our FY20E earnings and introduce FY21E CNL of RM10m. Maintain UP with unchanged TP of RM0.850 based on forward P/BV of 0.42x pegged to FY20E BV/share.

Below expectations. Excluding one-off overhead cost for plant’s temporary shutdown (RM5.1m), reversal of accruals (RM38.0m) and allowance for inventories written down (RM4.3m), Ann Joo recorded FY19 CNL of RM128.0m which came in below our and consensus expectations. This was mainly due to: (i) lower average selling price of rebar steel caused by oversupply issue, and (ii) higher-than-expected raw material cost. No dividend was announced, as expected.

Results’ highlight. YoY, FY19 recorded CNL of RM128.0m compared to CNP of 126.6m a year ago mainly due to: (i) lower average selling price caused by oversupply of steel in domestic market, (ii) lower sale tonnage in domestic market, and (iii) higher iron ore price in FY2019 caused by supply disruption. QoQ, 4QFY19 CNL further deteriorated to RM77.8m (+141%) compared to RM32.3m in the preceding quarter largely due to depressed margin caused by lower average selling price despite increased export tonnage.

Outlook. Overall, we remain cautious with its prospects as we expect depressed ASP for rebar steel, distressed by oversupply of steel products and softer domestic demand despite the revival of selected mega projects as the progress remains slow. However, we believe the normalisation of raw materials cost will help to improve products margin. Moreover, we are encouraged by the group’s strategy to actively pursue export opportunities, which may help in cushioning the negative impact from slower domestic demand and gaining tax incentive from increasing export. On the other hand, the company is at the stage of concluding the due diligence process for the JV with SSTEEL, and the management expect to complete the JV activity by 2HCY20.

Earnings revision. Post result, we maintain our FY20E earnings forecast and introduce our FY21E revenue of RM2,282m and CNL of RM10m which is based on lower raw material costs in view of iron ore supply resumption.

Maintain UP with unchanged TP of RM0.850 based on lower forward P/BV of 0.42x (at minus 1SD) pegged to FY20E BV/share of RM2.01, which we believe is justified due to: (i) depressed ASP of rebar steel, and (ii) weaker domestic and international demand.

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

Source: Kenanga Research - 25 Feb 2020