ANNJOO’s FY22 results disappointed on higher-than-expected production cost and weaker ASPs. Despite the recent improvement in long steel prices, prospects remain challenging, weighed down by lingering weak demand in the domestic and China markets. We maintain our FY23F earnings, TP of RM0.80 and UNDERPERFORM call.

Below expectations. FY22 core net loss of RM160m (after adjusting for RM27m gains from trespassing claims) was wider than our net loss forecast of RM107m and consensus estimate of RM120m. The variance against our forecast came largely from sustained high production cost aggravated by lower ASPs.

Results’ highlights. YoY, FY22 revenue increased 27% thanks to higher sales tonnage countering lower selling prices. Despite higher revenue, core net earnings plunged significantly by 141% to a loss primarily attributed to higher production cost caused by adverse time lag effects of higher raw materials and fuel costs.

ANNJOO hosted an analysts’ briefing yesterday with key takeaways as follows:

1. Despite China’s reopening, ANNJOO guided that the steel demand from the regional front has continued to remain weak due to high inflation, elevated energy prices as well as China’s weak economic growth prospect. These factors are weighing heavily on steel prices and the company do not foresee a turnaround unless there is a drastic policy shift.

2. Domestic demand for construction steel is expected to remain subdued due to the lack of mega infrastructure project rollouts. However, the group will actively pursue export opportunities to mitigate the domestic demand risk.

3. ANNJOO is expected to face margin compression in FY23 driven by the steep hike in electricity tariff i.e. to 20 sen/kWh surcharge (from 3.7 sen/kWh previously). Historically, utility cost accounted for 6% of total production costs

Despite a reprieve for steel prices, rebounding from the low in Nov 2022 (refer page 3), we remain cautious over the long steel prospects given the soft demand in China owing to the slow implementation of construction and infrastructure projects and its property debt crisis.

We maintain our FY23F earnings that have already factored in the higher electricity costs and introduce our FY24F numbers.

Maintain UNDERPERFORM with unchanged TP of RM0.80 based on 0.4x PBV. Amidst the current ASP down cycle, we find the 0.4x valuation ascribed fair being the average PBV valuations of long steel players (such as Masteel, Lionind, Annjoo) between late 2018 to early-2020 (pre-pandemic era) when steel prices were on a downtrend and these players were recording losses. There is no adjustment to TP based on ESG for which is 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) faster than expected rollout of infrastructure projects in Malaysia and China.

Source: Kenanga Research - 28 Feb 2023