ANNJOO’s 1HFY22 results met our forecast but missed market expectation. CNP shrank by 75% as ANNJOO carried high-cost COGS at a time when steel prices fell significantly, eroding its margins. We believe the outlook for steel prices globally will remain subdued over the short term given the disruptions to economic activities in China due to Beijing’s zero-Covid policy and the property debt crisis. We maintain our forecasts, TP of RM0.85 and UNDERPERFORM call.

Within our expectations. 1HFY22 CNP of RM40.1m accounted for 77% and 33% of our full-year forecast and the full-year consensus estimate, respectively. We consider the results within our expectation (as we expect a weaker 2H on further deterioration in steel prices), and outright below market expectation.

The CNP excluded RM27m gains from trespassing claims, but included RM88m inventory write-down which we regard as part and parcel of normal operations. ANNJOO marked down the value of its inventory (comprising steel rebars, billets and other inputs) in line with the prevailing market rates. The rebar price, for instance, has retreated by >20% from a peak of about RM3,700/MT in Mar/Apr 2022 to RM2,800/MT at present (see chart on page 3).

1HFY22 revenue increased 18% YoY as the ASP realised for its export sales (to China, Indonesia and the Philippines) was still higher than a year ago. However, CNP shrank by 75% as ANNJOO carried high-cost COGS (arising from the surge in the cost of inputs such as scrap, iron ore and coking coal) at a time when steel prices fell significantly, eroding its margins.

Outlook. We believe the outlook for steel prices globally will remain subdued over the short term given the disruptions to economic activities in China arising from intermittent lockdowns pursuant to Beijing’s zero-Covid policy, coupled with the property debt crisis in the second largest economy in the world. Nearer to home, the property sector in Malaysia continues to be weighed down by overhang, particularly in the high-rise segment. While hopes are high for the rollout of public infrastructure projects ahead of the 15th general election, job tenders remain scarce in the market. Adding salt to the wound, are the stickiness of the cost of inputs to the downside, coupled with the high cost and low availability of foreign workers.

Forecasts. We maintain our forecasts and TP of RM0.85 based on 0.4x PBV which is in line with the historical average of the long steel industry during the last downcycle between 2018 and early-2020 (just right before the pandemic). There is no adjustment to our TP based on ESG given a 3-star ESG rating as appraised by us (see Page 5). Maintain UNDERPERFORM.

Risks to our call include: (i) sharp rebound in steel prices, (ii) steep fall in input costs, and (iii) accelerated rollout of infrastructure projects in Malaysia and China.

Source: Kenanga Research - 29 Aug 2022