Ann Joo’s 1Q15 core net profit of MYR12.1m was above ours and street estimates, thanks to lower iron ore cost. Reiterate NEUTRAL with our TP lowered slightly to MYR1.10 (8% upside). We foresee volatile business environment in the medium term as steel prices may remain under pressure amid rampant competition from imported steel.

Core numbers ahead of forecasts. After stripping out a forex loss, Ann Joo’s 1Q15 core net profit of MYR12.1m was way ahead of our forecast but beat consensus estimates slightly. Management attributed the improvement to lower material costs particularly iron ore and further productivity gain. That said, we suspect the improvement was partly due to its exercise in writing down its inventory value and provision for diminution in value of raw materials totalling MYR10.3m in 4Q14.

Near-term outlook still challenging. Ann Joo’s blast furnace (BF) has reached better efficiency since mid-2014, but its cost advantage over electric arc furnace (EAF) operations has diminished quickly as scrap prices plunged to around USD250/tonne since early this year. By comparison, iron ore prices hovered at a narrow range of USD50 to USD70 over the same period. Furthermore, the Ministry of International Trade and Industry (MITI) had decided to terminate its investigation into the imports of Chinese steel bars early this year. This suggests extended competition from imported steel – particularly from China – which may continue to drag Ann Joo’s thin margins.

Reiterate NEUTRAL. We expect prices of local steel bars and wire rods to stay below MYR1,800/tonne in the near term. Despite a decent start to 2015, we prefer to keep a close eye on Ann Joo’s near-term development before revising our projections. We roll over our bookbased valuation to FY16 but trim our TP slightly to MYR1.10 (from MYR1.12), as we update our 5-year historical trading range, reducing its -1SD band marginally to 0.52x (from 0.54x). The limited upside and cloudy outlook prompted us to keep our NEUTRAL rating on the stock.

Source: RHB Research - 28 May 2015