1HFY21 CNP of RM157m surpassed expectations due to higher-than-expected margins thanks to the time-lag effect of raw material inventory costs amidst the surge in steel prices. However, we expect 2HFY21 to come in weaker once inventory costs play catch-up while ASPs stabilise. In view of steel prices staying elevated for a sustainable period, we raise our ASP assumptions for FY21 and FY22 to RM3,100/t and RM3,000/t. Consequently, we also raise FY21E/FY22E earnings by 36%/69%. Upgrade to MP on higher TP of RM2.20.

Surpassed expectations again. Despite the FMCO in June which hampered deliveries and production, 2QFY21 CNP of RM84m led 1HFY21 CNP to RM157.3m – strongly above our/consensus expectations at 82%/96% of full-year estimates, respectively. The positive deviation was due to higher-than-expected margins from its trading and manufacturing division thanks to the time lag effect of the raw material inventory costs amidst the surge in steel selling prices. A 6.0 sen dividend declared was inline.

Results’ highlights. QoQ, 2QFY21 CNP of RM84m increased 14% on higher export tonnage and higher steel prices of RM3,038/tonne from RM2,689/tonne (+13%). Likewise, 1HFY21 CNP of RM157m swung back to the black YoY against 1HFY20 CNL of RM51m mainly on higher steel prices of RM2,860/tonne vs RM2,102/tonne (+36%).

2HFY21 to come in weaker. We foresee 2HFY21 to register weaker earnings HoH as (i) steel selling prices stabilise while weighted average inventory/raw material costs play catch-up – leading to weaker margins at its manufacturing and trading division, and (ii) higher freight costs in tandem with increased rates globally.

Structurally, outlook points to an elevated steel price environment. China’s long-term policy to achieve carbon neutrality by 2060 has been felt by Chinese steel manufacturers through production limitations. Being the largest steel producer in the world, having a steel production cap would mean a tighter supply while demand remains elevated in line with the global Covid-19 recovery (albeit at an uneven rate among countries). Consequently, we believe this dynamic would keep steel prices at elevated levels compared to previous years. That said, we do not believe steel prices would be able to surpass peak prices seen in early May 2021 also because of the Chinese government’s commitment to control prices in order to keep inflation levels in check.

Earnings upgrade. In view of ASPs being elevated, we raise our FY21E/FY22E earnings by 36%/69% after factoring for higher ASPs of RM3,100/t (from RM2,825/t) in FY21 and RM3,000/tonne (from RM2,650/t) in FY22.

Upgrade to MP (from UP) on higher TP of RM2.20 (from RM1.60) pegged to lowered PER of 9x (from 11x). While we upgrade our call to MP on steel prices being elevated for a sustainable period, we lower our PER valuation of 11x to 9x. Our downgrade in valuations marks the end of surging steel ASPs and also reflects ANNJOO’s position as a commodity manufacturer who has no control over its selling prices and costs (i.e. raw material prices).

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

Source: Kenanga Research - 27 Aug 2021