Excluding a patchy mark-to-market profit/loss, Ann Joo’s 1H13 core net profit of MYR17.7m was satisfactory, driven mostly by domestic sales. It is focusing on driving 2H exports to benefit from its massive inventory built up prior to the MYR weakening. But the market may be concerned over its  exposure  to  USD  loans.  We  cut  our  valuation  to  -1SD or  0.71x FY14F P/BV, reducing our FV to MYR1.51. Maintain TRADING BUY. 
 
- Satisfactory  1H.  At  first  look,  Ann  Joo’s  1H13  net  profit  of  MYR11.4m appears  to  be  disappointing,  but  this  was  due  to  the  impact  from  an erratic  unrealised  MYR8.3m  forex  loss  in  2Q13.  In  view  of  the  vast fluctuations  seen  within  the  regional  currencies  of  late,  we  decided  to reclassify those unrealised forex profit/loss as exceptional items, deriving a core net profit of MYR10m for 2Q13 (+28.7% q-o-q) whilst its 1H core profit accounted for  ~41% of street/our  full-year  estimates. On  the  back of better local demand for steel bars, Ann Joo’s domestic sales rose by 9.3%  q-o-q.  Note  that  local  prices  enjoy  decent  premiums  vis-à-vis international steel prices.

- 2H  to  focus  on  sales?  As  at  end-June, Ann Joo’s inventory  continued to balloon to MYR1.5bn and the sudden plunge of the MYR vs the USD suggests  that  its  stockpile  is  now  below  current  selling  prices.  It  can leverage on its proven track record in exporting steel products to benefit from the weak MYR, however. We also see an upward bias in local steel prices from the weaker MYR. On the flip side, weaker currencies across the  region  (vs  the  USD)  may  dent  market  appetite  to  stock  up  on  steel inventory.  Also,  Ann  Joo  may  suffer  mark-to-market  losses  on  its  USD-denominated borrowings. Although mostly unrealised, every 10 sen drop in MYR against the USD will translate to a loss of MYR18.6m. 

- Reiterate  TRADING  BUY,  FV  lower  to  MYR1.51.  While  we  are  not overly  concerned  on  the  possible  mark-to-market  forex  loss,  the quantum could  be huge  and affect  market sentiment  towards  the stock. This,  this  prompts  us  to  lower  our  book-based  valuation  to  -1SD  from  -0.5SD of its historical trading range. This trims our FV to MYR1.51 (from MYR1.91),  derived  from  0.71x  FY14F  P/BV.  However,  we  maintain  our recommendation at TRADING BUY on possible decent recovery in core numbers. We also make no changes to our original projections.   

Source: RHB