Review

• Excluding a net exceptional gain amounting to RM28.7mn, ANNJOO reported 1HFY23 core net loss of RM49.1mn. This was below ours and consensus’s full-year profit forecasts of RM56.2mn and RM3.4mn, respectively. The variance was mainly due to lower-than-expected average selling prices and sales tonnages.

• YoY, the group registered a core net loss of RM49.1mn in 1HFY23 as compared with a core profit of RM126.8mn, while revenue was 14.5% lower at RM1,264.4mn. The poorer earnings performance was largely attributed to lower average selling prices of steel products as well as weaker sales volume.

• QoQ, the core net loss in 2QFY23 narrowed to RM19.7mn from RM29.4mn, thanks to lower raw material and energy costs. Meanwhile, the revenue dropped 11.5% to RM593.6mn from RM670.7mn due to lower average selling prices and sales tonnage.

• The group’s net gearing position increased to 1.1x from 0.9x a quarter ago attributed to additional term loans for business expansion.

Briefing Highlights:

• The prolonged real estate crisis currently hampers the economic recovery of China. Therefore, the steel demand in China is expected to remain lacklustre. On the domestic front, Malaysia's demand for long steel products remains soft due to the lack of new mega infrastructure projects.

• In terms of key raw materials such as iron ore, scraps, and coking coal, management believes that the prices are likely to normalise and be more manageable in the upcoming quarters.

• Pertaining to the recent acquisition of Perfect Channel Sdn Bhd (PCSB), management is targeting to revive the manufacturing operations next year. Recap, PCSB is principally involved in manufacturing hard-drawn wires, galvanised steel wires and other wire products. It ceased operations in 2019 due to a fire accident. Over the long run, PCSB intends to expand into engineering-grade wire rod production.

Impact

• Following the weaker-than-expected results, we cut the sales tonnages and average selling price assumptions for certain steel products for FY23. Consequently, we forecast a core loss of RM8.1mn for FY23. Meanwhile, we maintain our FY24 and FY25 earnings forecasts.

Outlook

• Although we foresee the domestic demand for long steel would improve once the government decides to roll out new mega infrastructure projects, we remain cautious on the outlook as the global average selling prices of steel products are likely to remain depressed due to soft demand from China.

Valuation

• No change to our target price of RM0.88, based on unchanged 7x CY24 earnings. Maintain a Sell call on the stock.

Source: TA Research - 30 Aug 2023