ANNJOO’s 1HFY23 results disappointed with a loss due to a weak ASP and demand for its steel products. The outlook for the steel sector is bleak amidst various economic challenges in China. We now project a loss in FY23F (vs. a profit previously), cut our FY24F earnings by 37% and reduce our TP by 3% to RM0.73 (from RM0.75). Maintain UNDERPERFORM.

Below expectations. Its 1HFY23 results disappointed with a core net loss of RM34m, against our full-year net profit forecast of RM12m and the full-year consensus net profit estimate of RM34m. The variance against our forecast came largely from weaker demand and ASPs for its steel products.

Results’ highlights. YoY, its 1HFY23 revenue fell 15% on lower sales volume and ASP. The market rebar prices dropped 13% to RM2,877/tonne in 2QFY23 from RM3,314/tonne a year ago. It sank into the red at the net level (from a profit a year ago) as it operated below the breakeven point at the sales volume and ASP in 1HFY23, despite lower input costs especially for coking coal.

QoQ, its 2Q core net loss narrowed significantly to RM5m on a lower effective inventory cost thanks to the reversal of RM15m inventory write-off (vs. inventory impairments of

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

1. The outlook for the steel sector remains bleak due to various economic challenges in China. Also, ANNJOO said that there is yet a pick-up in demand locally ahead of the peak construction period in the local market, typically in the months of Sep and Oct. On a brighter note, steel prices could be buoyed by supply constraints and the cost of inputs such as iron ore, scrap metal and coking coal is a lot more benign and stable.

2. ANNJOO is acquiring a company called Perfect Channel Sdn Bhd (PCSB) which is engaged in the manufacture of hard drawn wires, galvanised steel wires and other wire products for RM10m cash. The acquisition of PCSB will expand ANNJOO’s product range to include engineering-grade steel wire rods. In addition, the location of the plant is strategically located in Gurun industrial park which boasts high daily average sunlight for solar power energy generation.

3. ANNJOO’s net gearing went up to 1.12x (from 0.79x a year ago) on an additional term loan of RM132m to fund the acquisition of PCSB as well as investment in green technology. It intends to keep its net gearing at below 1.5x, which give it substantial buffer against <2.0x required by its bankers.

Outlook. The outlook for the steel sector globally is bleak amidst various economic challenges in China and the slowdown in various advanced economies. On a brighter note, the local demand for steel is poised to pick up on: (i) the roll-out of the RM45b MRT3 project and six flood mitigation projects reportedly to be worth RM13b, and (ii) an accelerated disbursement of the massive RM97b gross development expenditure budgeted under Budget 2023 (+35% YoY over RM71.6b a year ago).

Forecasts. We now project a loss in FY23F (vs. a profit previously), cut our FY24F earnings by 37% to reflect weaker steel ASP and sales volumes.

Correspondingly, we reduce our TP by 3% to RM0.73 (from RM0.75) based on 0.35x PBV, in-line with the average PBV for the steel sector during the previous downcycle between late-2018 and early-2020. 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) 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 Aug 2023