Ann  Joo’s  1HFY14  core  profit  of  MYR12.0m  was  below  our/street estimates, mainly attributed to intense competition from imported steel, an abnormal plant breakdown and a stock adjustment loss. We think its share price may have run ahead of its fundamentals  as  Government’s trade remedy  against China’s steel dumping  may take  a longer  time  to roll  out.  Downgrade  to  SELL,  with  our  FV  trimmed  to  MYR1.07  (from MYR1.10).

Below  expectations.  Excluding  an  unrealised  forex  gain,  Ann  Joo’s 1H14  core  net  profit  of  MYR12.0m  was  way  below  our  and  street estimates. We had earlier expected an inventory writedown to realisation value in 1Q14 and cheaper hot metal production costs following a drop iniron ore and coke prices  may help  boost its 2Q14 numbers. All in, the disappointing  results  can be attributed to:  i)  China’s  intensified dumping of steel bars and wire rods, which has  forced  local producers to lower ther  selling prices,  ii)  an abnormal breakdown  at  certain part of  its blast furnace  (BF)  operation,  which  resulted  in  higher  overhead  and opportunity costs, and iii) a one-off stock adjustment loss of MYR7.7m.

Near-term  outlook  still  bumpy.  While  Ann  Joo’s  BF  has  resumednormal  operation  since  late  April  2014,  we  believe  it  may  take  a  fewmore  months to  reach  its  optimum efficiency.  We  also  believe that  the Government  may take a while to introduce  measures to stem  the influx of cheaper steel products from China.  In addition,  the  fasting month  and Hari  Raya  holiday  during  3Q14  may  translate  into  slower  construction activities, and hence lower steel demand.

Downgrade to SELL. We lower our overall selling price assumptions for steel bar and wire rods by MYR50/MYR25 per tonne for FY14/15, and as a result, slash our FY14/15 earnings estimates by 48%/21.5%. The stock has  gained  some  26.7%  YTD,  possibly  driven  by  high  market expectations  of  a  potential  trade remedy  to improve local steel market. As  government measures  usually take a long time to  roll out  and  givenAnn Joo’s poor 2Q14 results, we  think the share price has run ahead of its  fundamentals  and  therefore  downgrade  our  call  to  SELL  (from Neutral).  Following  our  earnings  revision,  we  trim  our  FV  to  MYR1.07(from MYR1.10), pegged to an unchanged  0.5x FY15F  P/BV (-1SD from its historical trading range).

S

Source: RHB