ANNJOO’s 9MFY22 results disappointed on an unexpected loss in 3QFY22 due to weak steel demand and selling prices. The prospects for steel demand will stay weak on weak construction activities in China due to lockdowns and a property debt crisis. We now forecast RM107m net loss in FY22 (vs. a RM52m net profit previously) and reduce our FY23F net profit by 43%. We lower our TP by 6% to RM0.80 (from RM0.85) and reiterate our UNDERPERFORM call.

Below expectations. 9MFY22 results disappointed with a core net loss of RM94m (after adjusting for RM27m gains from trespassing claims), vs. our full-year net profit forecast of RM52m and the full year consensus net profit estimate of RM120m. The variance against our forecast came largely from a huge loss of RM134m in 3QFY22, weighed down by the double-whammy of weaker steel selling prices but high inventory cost.

9MFY22 revenue increased 35% YoY on higher steel prices and tonnage recorded. Nonetheless, its bottom line sank into the red, no thanks to its higher inventory costs coupled with inventory impairments costing RM135m (vs. RM5m a year ago) as ANNJOO repriced their high-cost inventories (steel rebars, billets and raw mats) to commensurate with the prevailing rebar market rate of c.RM2,600/tonne as of end Nov 2022. Recall that rebar prices have been on a steep downtrend since the end of June 2022 (refer to price chart in page 3). We do not adjust our earnings for the write-down of inventories as the volatile steel price fluctuation is part and parcel of the steel business.

ANNJOO hosted an analyst briefing yesterday and the key takeaways are as follows

1. The steel demand from the regional front continues to remain weak largely due to China’s zero-Covid strategy and its property debt crisis. Not helping either is the lacklustre local demand stemming from the absence of new infrastructure and building projects with most ongoing projects closing towards their tail-end stage. These factors have weighed heavily onto steel prices of which the company do not foresee a turnaround unless there is a shift in policy from China.

2. In view of the weak local demand, the group is looking to export its steel rebars to Singapore which has seen robust construction activities post Covid. Historically, Singapore imports its rebars from Indonesia, Turkey and Alliance Steel (Malaysia). Priced in SGD, these rebar exports would start contributing in FY23.

3. ANNJOO could face higher electricity bill in FY23 if the global energy cost stays elevated.

4. With its net gearing increasing to 0.91x (from 0.72x a year ago), the group has placed higher priorities in managing its working capital and cash flow. Nonetheless, ANNJOO shared that it remains comfortable with net gearing levels below 1.5x and its bankers are still willing to extend credit facilities so long its net gearing remains <2.0x.

Outlook. Moving forward, while steel demand and price prospects continue to remain bleak, we believe losses in 4QFY22 would narrow as ANNJOO has already impaired its inventories to prevailing low prices which reflects an extremely pessimistic backdrop. Should China pivot away from its strict Covid-19 policy or the local construction activities pick up upon pump priming activities by the new government, steel prices could potentially see a gradual recovery and ANNJOO would consequently reverse the impairments made.

Forecasts. We now forecast a RM107m net loss in FY22 (vs. a RM52m net profit previously) and reduce our FY23F net profit by 43% after reflecting weaker steel selling prices.

Maintain UNDERPERFORM with a lower TP of RM0.80 (from RM0.85) pegged to unchanged PBV of 0.4x. Amidst the current ASP down cycle, we find the 0.4x valuations ascribed fair as such valuations are the average PBV valuations of long steel players (Masteel, Lionind, Annjoo) between late 2018 to early-2020 (pre-pandemic) when steel prices were on a downtrend and these players were recording losses. There is no adjustment to TP based on ESG given a 3-star ESG rating as appraised by us.

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

Source: Kenanga Research - 30 Nov 2022