Ann  Joo’s  9M14  core  net  profit  of  MYR30.1m  was  above  our/street estimates,  thanks  to  cheaper  hot  metal  production  cost  via  BF  route following declining iron ore and coke prices in 3Q. Ann Joo is upgraded to  TRADING  BUY  (from  Sell),  with  its  TP  lifted  to  MYR1.37  (from MYR1.07) (19% upside).  As  we expect  both raw material  prices  to stay low for the medium term, we raise our FY14/15 earnings estimates. 

Above  expectations.  Excluding  an  unrealised  forex  gain,  Ann  Joo’s 9M14 core net profit  of MYR30.1m was above  our and street estimates.Although local steel mills continue to compete with  intensified dumping of steel bars and wire rods from China, the company managed to raise its sales tonnage, which resulted in the  22.0% YoY  rise of  its  YTD  revenue. The  drop  in  iron  ore  prices  to  around  USD80  a  tonne  and  lower  coke prices  in  3Q  also  translated  into  cheaper  hot  metal  production  cost. Coupled  with  its  trading  division  delivering  stable  profit  and  its  blast furnace (BF)  resuming  a  normal  operation  after  an abnormal breakdown in 2Q,  all  these factors  have  helped  to  enhance  its EBIT margin  in 3Q14 to 6.9% vs 1.4% in 2Q14.

BF  cost  advantage  is  here  to  stay?  Post  the  breakdown  in  2Q,  Ann Joo’s  BF  has  reached  the  optimum  efficiency  earlier  than  our  initial expectation.  Ann Joo’s  BF may enjoy better cost advantage over electric arc furnace (EAF) operation,  at least for  the  short to medium term with the  recent  plunge  of  iron  ore  prices  to  just  under  USD70  a  tonne,together with  depressed  coke prices,  in  our opinion.  Apart from that,  we expect  the implementation of various infrastructure and  PRIMA  housing projects  by  the  Government  to  help  sustain  the  demand  for  building materials, including steel. 

Upgrade to  TRADING  BUY.  With better-than-expected results  and  the BF  advantage  in  terms  of  production  costing,  we  decide  to  revisit  our financial  model.  We  increase  Ann  Joo’s  FY14/15  estimates  by 75.7%/37.6%  for  FY14/FY15  respectively  and  introduce  our  FY16 projection.  That said, we upgrade the company  only  to  TRADING  BUY (from  Sell)  as  we  expect  stiff  competition  from  imported  steel  to  stillpersist  until  the Government takes  the  appropriate action to curb those dumping  activities.  Meanwhile,  our  TP  is  raised  to  MYR1.37  (from MYR1.07)  on  the  back  of  higher  earnings  and  a  higher  0.62x  FY15FP/BV, or -0.5SD from -1.0SD of the stock’s historical trading range.

Source: RHB