ANNJOO’s 1QFY23 results disappointed, weighed down by high cost inventory as well as inventory markdowns. We are cautious on the outlook for the steel market due to the sluggish property and construction markets in China. Hence, we cut our FY23-24F earnings forecasts by 54% and 31%, respectively, reduce our TP by 6% to RM0.75 (from RM0.80) and maintain our UNDERPERFORM call.

Below expectations. 1QFY23 results disappointed with a core net loss of RM29m, against our full-year net profit forecast of RM25m and the full-year consensus net profit estimate of RM75m. The variance against our forecast came largely from high-cost inventory and the marking down of inventory value.

Results’ highlights. YoY, 1QFY23 revenue was flat on subdued exports and selling prices. It slipped into the red (from a profit a year ago), weighed down by high-cost inventory and inventory markdowns, in line with the prevailing market rates. Rebar prices dropped 12% to RM2,650/tonne in 1QFY23 from RM3,000/tonne a year ago.

QoQ, ANNJOO reported a narrower net loss of RM29m in the absence of major plant maintenance cost (vs. RM14m incurred in 4QFY22) as well as higher selling price despite a lower export tonnage. Rebar prices eased marginally to RM2,650/tonne as mentioned from RM2,665/tonne three months ago.

The key takeaways from its analyst briefing yesterday are as follows:

1. ANNJOO is cautious on the outlook for steel demand. While the Chinese government has introduced various measures to stabilise the property market in China, a meaningful recovery is still far on the horizon. The property sector consumes about a third of total steel production in China. Nonetheless, the demand for steel from the construction sector in China should gradually pick up over the course of the year as construction activities normalise after the Lunar new year holiday season.

2. Pending the roll-out of public infrastructure projects locally, ANNJOO is focusing on exporting its steel rebar to Singapore. It is supplying to infrastructure projects in the city state such as the Cross Island Line (CRL) that will last until 2030.

3. ANNJOO is bracing for the brunt of higher electricity tariff and rising interest rates.

Outlook. We are cautious on the outlook for steel demand due to subdued demand in China on the back of a sluggish property market while the roll-out of construction and infrastructure projects has not been as robust as anticipated. Also contrary to expectations, the reopening has not provided much impetus to the second largest economy in the world.

Forecasts. We cut our FY23-24F net profit forecasts by 54% and 31%, respectively, to reflect high input costs and lower export tonnages.

Maintain UNDERPERFORM with lowered TP of RM0.75 based on 0.35x 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 they 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 (see page 5).

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 - 30 May 2023