Results Review

• Excluding a net exceptional loss amounting to RM11.3mn, ANNJOO reported 9MFY19 core net loss of RM98.1mn. This was below ours and consensus’s full-year net loss forecasts of RM65.3mn and RM5.4mn respectively. The variance was mainly due to: i) lower-than-expected tonnage sold, ii) lower-than-expected selling prices of steel products, iii) higher-than-expected raw material costs, and iv) allowance for inventories write-down of RM54.9mn.

• YoY, the group recorded a core net loss of RM98.1mn in 9MFY19 as compared with a core profit of RM105.4mn while revenue dropped by 1.7% to RM1,617.7mn. The dismal performance was mainly due to: i) lower selling prices; ii) lower sales tonnage; iii) rising costs of raw materials, and iv) inventories write-down as a result of lower steel prices.

• QoQ, the group posted a core net loss of RM63.0mn in 3QFY19 as compared with a core net loss of RM28.8mn a quarter ago due to sharp decline in selling prices, higher raw materials cost, and further recognition of allowance for inventories write-down. Meanwhile, the revenue dropped 12.0% to RM505.3mn due to depressed selling prices and lower tonnage sold in both local and export markets.

• The group’s net gearing position climbed to 0.93x from 0.82x a quarter ago.

Briefing Highlights:

• The management guided that the group might be able to achieve lower production cost in the upcoming quarters as a result of lower raw materials prices in comparison with the reporting quarter.

• The group is actively pushing for export sales in 4QFY19 due to higher selling prices abroad. In addition, the foreign demand for steel products may be boosted by lower steel production during the winter months in China.

Impact

• Following the weaker-than-expected results, we raise production costs assumptions and lower FY19 to FY21 average selling price assumption for billet from RM2,200/ RM2,150/ RM2,100 per MT to RM1,900/ RM1,925/ RM1,980 per MT respectively. We have also reduced the FY19 to FY21 utilisation rate assumption for billet. All in, we forecast a wider core net loss of RM134.2mn (from RM65.3mn) for FY19 and we trim the FY20 and FY21 earnings forecasts by 55.3% and 41.7% to RM12.2mn and RM28.0mn respectively.

Outlook

• We expect the steel bar prices to remain depressed given that: i) demand from both construction and property sectors is expected to remain soft, ii) issue of oversupply of long steel products in domestic market, and iii) indirect impact from global trade war.

Valuation

• After revising the earnings forecasts, we lower the target price from RM0.95 to RM0.89, based on unchanged 0.4x CY20 P/B. Maintain Sell on the stock

Source: TA Research - 28 Nov 2019