AJR’s 9M13  core  net  profit  of  MYR17.1m  fell  below  our  and  street estimates. Management’s focus is to increase sales tonnage in order to lower its gearing and interest expenditures in the near term. We trim our FY13F  numbers,  as  we  see  a  possibility  of  the  company  missing  our estimates.  That,  on  top  of  the  currently  low  interest  in  steel  stocks, leads us to downgrade the stock to NEUTRAL, with a MYR1.04 FV.

- 9M13  results  were  below  expectations.  After  stripping  off  an unrealised forex loss of MYR15.6m for 9M13, Ann Joo (AJR)’s core net profit  of  MYR17.1m  was  below  our  and  street  estimates.  Its  3Q13 numbers were disappointing, being marginally in the red. Had it not been for  the  overprovision  of  deferred  tax  expenses  from  prior  years  and  an unabsorbed  capital  allowance  that  translated  to  positive  tax  expenses, AJR would have reported a wider loss in 3Q. Steel prices weakened, on top  of  the  Hari  Raya  festival  and  fasting  month  which  slowed construction  activities  and  dampened  steel  usage.  AJR’s  management also  claimed  that  wire  rod  dumping  remains  rampant,  despite  the imposition of an anti-dumping duty.

- Focus  on  sales.  AJR’s inventory continued to stay  at  c.MYR1.5bn,  on the  back  of  sluggish  steel  demand  in  3Q.  The  signals  sent  by  its management  during  the  results  briefing  yesterday  were  not  very encouraging.    As  such,  it  is  slated  to  increase  sales  in  order  to  trim  its stockpile,  which  would  decrease  its  gearing  (1.8x  as  at  30  Sept)  and interest expenditure. In the meantime, our quick analysis on its cash flow and balance sheet position indicates its financials remain healthy, which give  no  cause  for  concern  at  this  juncture.  However,  as  we  believe  the company may not meet our FY13 numbers, we cut our FY13 estimate by 39.4% but keep our FY14 numbers unchanged.

- Downgrade  to  NEUTRAL,  MYR1.04  FV.  We  expect  AJR’s results to improve  moving  into  2014,  as  the  demand  for  steel  is  expected  to  pick up  on  the  back  of  the  construction  of  mega-projects  and  Government- backed  affordable  houses.  However,  investors  are  likely  to  shy  away from the sector, as two steel counters were recently designated as PN17 status.  That,  on  top of  the company’s weak  3Q,  leads us  to  downgrade AJR to NEUTRAL (from Trading BUY) and trim its FV to MYR1.04 (from 
MYR1.51), premised on 0.5x FY14F P/BV.

Source: RHB