Results Review

• Stripping out a net exceptional loss amounting to RM9.2mn, ANNJOO reported 1HFY19 core net loss of RM35.1mn. This was within our expectation of full-year net loss forecast of RM11.8mn but below consensus’ profit forecast of RM38.7mn. We expect a stronger 2HFY19 mainly due to the recognition of lumpy tax incentives in final quarter, as was the case in prior years.

• YoY, the group recorded a core net loss of RM35.1mn in 1HFY19 as compared with a core profit of RM88.6mn despite revenue increased 1.3% to RM1,112.4mn. The weaker performance was mainly due to: i) lower selling price; ii) rising costs of raw materials and fuel; and iii) higherthan-usual production cost as a result of scheduled blast furnace shutdown. Meanwhile, the revenue growth was mainly attributed to higher export tonnage sold.

• QoQ, the group posted a core net loss of RM28.8mn in 2QFY19 as compared with a core net loss of RM6.3mn a quarter ago due to higher raw materials cost and higher-than-usual production cost as a result of scheduled blast furnace shutdown. Meanwhile, the revenue increased 6.7% to RM574.3mn due to higher export tonnage sold.

• The group’s net gearing position increased slightly to 0.82x from 0.77x a quarter ago.

Briefing Highlights:

• The management expects the price of raw materials such as iron ore and coking coal to face downward pressure due to steel production curbs in China as part of its anti-pollution measures. Hence, the group may be able to achieve lower production cost in the upcoming quarters.

• The group has restarted its blast furnace in early July after successfully completed the relining exercise in order to improve the production efficiency.

Impact

• Maintain our FY19 to FY21 earnings forecasts.

Outlook

• The domestic steel price is expected to remain depressed due to soft domestic demand and new entry of supply from Alliance Steel.

• The escalating trade war between US and China may further prompt the global steel mills to dump their steel products previously exported to US, to other parts of the world, including Malaysia. This may exert downward pressure on the steel price in the Malaysia market.

Valuation

• No change to our target price of RM1.00, based on unchanged 0.4x CY20 P/B. Maintain Sell call on the stock.

Source: TA Research - 29 Aug 2019