1QFY22 CNP of RM32.9m came below expectations as we expect upcoming quarters to face further margin pressures from rising input costs while rebar/billet ASPs remain flat. 1.25 sen dividend declared was inline. Downgrade FY22E/FY23E earnings by 66%/53%. Amidst shrinking earnings and potentially losses for the subsequent quarter, we reduce TP to RM1.25 (from RM1.70) on lower PBV of 0.6x (from 0.75x) and maintain UNDERPERFORM.

Below expectations. 1QFY21 CNP of RM32.9m accounted for 21%/16% of our/consensus full-year estimates. This is below expectations as the upcoming quarters would face further margin pressures from rising input costs (scrap, coke, iron ore) given the global supply disruption while rebar/billet ASPs have remained flattish. Dividend of 1.25 sen declared is inline.

QoQ, despite the weaker revenue (-9%), CNP improved 99% to RM32.9m on stronger margins as the previous quarter suffered from inventory impairments worth RM34.5m due to the declining steel prices. Note, we do not reverse out the write-down of inventories to derive our CNP as the highly volatile steel price fluctuation is part and parcel of the steel business.

YoY, 1QFY22 CNP declined 55% despite the higher revenue (+17%) due to lower EBIT margin (-8ppt) arising from higher inventory costs. Note that 1QFY21 (previous preceding quarter) margins were strong as it benefitted from rising rebar/billet ASPs on the back of low-priced inventories.

Highly uncertain outlook. With the on-going Russia-Ukraine war and Chinese lockdowns which have stymied rebar/billet demand while input costs are surging, we foresee the upcoming quarters to be challenging for the group. ANNJOO which exported a sizeable quantum of billets to China last year will have to divert their exports to South East Asian countries (i.e. Philippines) during this period. We believe pricing and demand would not be as great given that supply would outstrip demand.

Meanwhile, input costs (especially coking coal – i.e. raw material for coke) continue to be on the uptrend due to supply halt from Russia. The increasing labour and transport costs would also exacerbate the cost pressure. This would inevitably lead to margin compressions for the group. While the easing of Chinese lockdowns could buoy rebar/billet ASPs, we believe cost pressures would likely remain elevated.

Downgrade FY22E/FY23E earnings by 66%/53% after imputing for higher input costs, higher USD/MYR rate of 4.40 (from 4.20) and lower sales from lower steel demand.

With ANNJOO’s bottom-line earnings set to shrink this year and potentially sinking into losses in the subsequent quarters, we believe investor interest for steel-related companies would be tepid. Consequently, we reduce our ascribed FY22E PBV valuations to 0.6x (from 0.75x) and lower TP to RM1.25 (from RM1.70). We find our newly ascribed valuations of 0.6x Fwd. PBV fair as ANNJOO traded between 0.4x to 0.7x Fwd. PBV between late 2018 to early 2020 (prior to the pandemic) when steel prices were flat/weak, and ANNJOO was recording losses. Maintain Underperform.

Source: Kenanga Research - 30 May 2022