Although  AJR’s  1QFY13  earnings  of  MYR9.7m  in  1QFY13  failed  to excite  us,  this  may  herald  a  possible  turnaround  in  the  local  steel industry.  The  rollout  of  mega-projects  may  gather  steam  and  boost demand,  while  new  infrastructure  and  PR1MA  housing  projects  may improve  market  sentiment.  This,  together  with  growing  risk  appetites towards beta sectors post-general election, prompts us to maintain our TRADING BUY call. Our MYR1.91 FV implies a 0.9x FY14 BV, or -0.5 SD from the stock’s historical trading range.

- Satisfactory  start.  Ann  Joo  (AJR)  posted  earnings  of  MYR9.7m  in 1QFY13,  which  came  marginally  short  of  our  and  street  estimates.  Its revenue  for  the  period  rose  23.2%  q-o-q,  but  YTD  revenue  came  in 20.4% lower than the corresponding period in FY12, mainly attributed to lower export tonnage. However, improvements in  its mini Blast Furnace (BF)’s efficiency  helped  to  lift  the  contribution  from  its  manufacturing division  to  RM6.5m  in  operating  profit.  Core  operations  aside,  the company’s bottom-line also partly lifted by a positive tax item recognized as a deferred tax asset in its 1QFY13 numbers.

- A  possibly  brighter  2H. We recently revised up AJR’s  earnings  in  our last sector update dated 20 May 2013. While its earnings have improved, we  do  not  feel  our  projection  of  its  turnaround  gives  cause  for excitement. The steel industry’s performance in 1H was partly impacted by  the  general  election,  the  run-up  of  which  cooled  down  the implementation of most mega-projects. As Barisan Nasional has retained control  of  the  Federal  Government,  the  implementation  of  these  mega-projects may gain in momentum once more.

- Reiterate  Trading  BUY.  That  said,  a  possible  improvement  in  2H  may return AJR to the black (compared to its MYR19m loss in FY12), which could  pique  investor  interest.  Investors’ risk appetites toward cyclically high  beta  stocks  are  another reason  for  us  to  keep  our  TRADING  BUY recommendation on AJR. Our FV of MYR1.91 is based on 0.9x FY14 BV or  -0.5SD  from  the  stock’s historical trading range. We also make no changes to our original projections.

Source: RHB