9MFY20 core net loss CNL of RM71m came within ours/consensus expectations. Despite the current steel price rally in China, we do not foresee a rebound in 4QFY20 earnings due to: (i) a month long unplanned shut down in its EAF unit, and (ii) higher China steel prices which will not cascade to significant gains for local upstream players like Annjoo. That said, we upgrade TP to RM0.77 (from RM0.50) on higher PBV multiple to reflect the marginally better local steel demand moving into FY21. Maintain UP.

Within expectations. 9MFY20 core net loss CNL of RM71m came within our/consensus full-year loss expectations of RM98m/RM103m respectively. We expect 4QFY20 to remain in the red due to: (i) a month long unplanned shutdown at its electric arc furnace unit, and (ii) sustained low rebar demand from the local front. No dividends as expected.

Highlights. QoQ, 3QFY20 CNL narrowed to RM20.2m (from RM33.5m) as the rebound in activities post the MCO-laden 2QFY20 led to a surge in revenue (+62%) from higher sales tonnage at both its trading and manufacturing divisions. 9MFY20 losses widened 42% YoY due to the weaker domestic steel prices coupled with weaker tonnage sales mainly due to the Covid-19 pandemic.

Better but not great. While the current increase in steel prices at China is a positive development, it is unlikely to have a profound impact towards Annjoo’s earnings in our view due to: (i) simultaneous increase in raw materials costs i.e. iron ore and scrap, and (ii) Annjoo’s exports to China fetching relatively lower margins as products exported are semi-finished products such as billets vs. finished products i.e. rebars which garners higher margins.

The requirements. We think that in order for Annjoo to see significant earnings turnaround; elevated demand of steel in both China and Malaysia will have to be concurrent – boosting prices in both regions. This would then provide opportunity for Annjoo to sell rebars domestically without interference from imports and Alliance Steel’s new capacity (since 2018).

Nonetheless, we think chances of such simultaneous occurrence is slim as domestic steel prices will only be lifted when local construction activities commence in a significant manner – possibly towards 2H 2021; by when China steel prices would have subsided – due to a ramp-up in supply and normalisation of demand there. Even if both regions’ prices are elevated at the same time, we doubt it would be for a prolonged period of time.

Embedded hurdle. Structurally, due to the emergence of Alliance Steel’s massive capacity of 3.5m tonnes locally, we doubt local upstream steel players can relive their 2016–2018 heydays. Factoring all considerations, we believe the recent rally in upstream steel counters is premature without fundamental backings from an earnings recovery point of view.

With no change to our earnings, we maintain Underperform but  upgrade TP to RM0.77 (from RM0.50) on higher PBV multiple of 0.38x pegged to -1SD (from -2SD) to reflect marginally better steel demand prospects from a pick-up in local construction activities next year.

Source: Kenanga Research - 30 Nov 2020