FY21 CNP of RM243m came below expectations due to writedown in inventories incurred as Chinese steel prices plunged c.18% during the quarter. 6.0 sen dividend declared brought YTD dividend to 12.0 sen – within our 10.5 sen estimate. Downgrading to UP (from MP) on unchanged TP of RM1.70 premise on Annjoo’s recent rise in share price coupled with our view that earnings would come off steeply due to the lower steel ASPs (on weaker demand) and rising costs.

Below expectations. 4QFY21 CNP of RM16.5m led FY21 to RM243m – below ours/consensus full year estimates at 93%/79% respectively. The underperformance is largely due to the steep fall in Chinese steel prices (from c.RM3800/t to RM3100/t) during the quarter (attributable to the property debt crisis) which led ANNJOO to write down RM34.5m worth of inventories. We do not reverse out the writedown of inventories to derive our core bottomline as the highly volatile steel price fluctuation is part and parcel of the business. A 6.0 sen dividend declared brought YTD dividend to 12.0 sen – within our 10.5 sen estimate.

Results’ highlights. QoQ, despite the stronger revenue (+82%), CNP declined 76% to RM16.5m on weaker margins as (i) there was impairment of inventories worth RM34.5m as explained above, and (ii) average raw material costs continue to play catch-up during the quarter from a low base. Meanwhile, FY21 CNP of RM243m swung back to the black YoY against FY20 CNL of RM54m mainly on higher steel prices of RM3,020/tonne vs RM2,121/tonne (+42%).

Uncertainty lingers. With the property debt crisis in China, prospects for property demand in China is likely to wane and this would indirectly affect the prices for long steel products. Case in point, China’s long steel prices seen a sharp drop in October 2021. However, on the supply side, China’s long-term policy to achieve carbon neutrality by 2060 would contribute to a tighter supply in the mid-long term which means steel prices would be somewhat supported. Nonetheless, we believe steel uptrend seen over the past year has ended and steel prices would not be able to surpass peak prices seen in early May 2021 - also because it is in the Chinese government’s interest to keep a lid on commodity prices in order to keep inflation levels in check.

Hey days are likely over. The strong margins exhibited by Annjoo over FY21A is likely over and will normalise in FY22 as raw material costs continue to play catchup while ASPs stabilises.

Maintain FY22E earnings backed by ASP of RM3,000 per tonne. Introduce FY23E earnings of RM94m on ASP of RM2,950 per tonne.

Downgrade to UNDERPERFORM (from MP) with unchanged TP of RM1.70 pegged to unchanged 0.75x PBV. Our downgrade is premise on Annjoo’s recent rise in share price coupled with our view that earnings would come off steeply due to the lower steel prices (on weaker demand) and rising costs. Note, back in 2018, Annjoo’s Fwd. PBV valuation fell from a peak of 1.6x to a low of 0.5x when steel prices came off then.

Source: Kenanga Research - 1 Mar 2022