Review

• Excluding a net exceptional gain amounting to RM27.9mn, ANNJOO reported 9MFY23 core net loss of RM102.6mn. This was below ours and consensus’s full-year net loss forecasts of RM8.1mn and RM56.7mn, 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 RM102.6mn in 9MFY23 as compared with a core profit of RM49.0mn, while revenue was 15.0% lower at RM1,903.0mn. The weaker earnings performance was primarily attributed to lower average selling prices and sales tonnage of various steel products.

• QoQ, the core net loss in 3QFY23 further widened to RM53.5mn from RM19.7mn due to lower average selling prices of steel products. Nevertheless, the group saw its revenue jump 7.6% to RM638.6mn from RM593.6mn, thanks to higher sales tonnage. Briefing Highlights:

• The domestic long steel market is still negatively affected by escalating operating costs and soft demand due to a lack of new mega infrastructure projects.

• The iron ore price has shown an upward trend due to strong buying interest from China. Meanwhile, the coking coal prices should maintain upward momentum in 2H2023 due to supply tightness.

• Based on management’s guidance, Perfect Channel Sdn Bhd (PCSB) is on track to revive manufacturing operations by early next year. Recap, PCSB is principally involved in manufacturing hard-drawn wires, galvanised steel wires and other wire products. We are positive about the latest development as it will further expand the group’s product mix.

Impact

• Following the weaker-than-expected results, we forecast a higher core net loss of RM86.4mn for FY23 after factoring in lower sales volume and average selling prices of certain steel products as well as higher raw materials and energy prices. Meanwhile, we maintain our FY24 and FY25 earnings forecasts.

Outlook

• The market sentiment for the global steel market has slightly improved following the announcement by China to issue 1 trillion yuan in government bonds to support the reconstruction of the areas that were hit hard by natural disasters. However, we remain cautious about the outlook of the global steel market as China might need additional time to roll out the projects to boost the demand.

• The Ministry of Investment, Trade and Industry (MITI) has imposed a 2- year moratorium to allow reassessments to address the numerous challenges the local steel industry faces. Meanwhile, MITI will also focus on helping the local steel players to achieve carbon neutrality objectives.

Valuation

• We take this opportunity to increase the target PE multiple for ANNJOO from 7x to 8x, as we are more optimistic about the local steel industry’s long-term outlook, following a stronger commitment from the government to address some of the long-standing issues such as overcapacity and pollution. With that, we revised the target price from RM0.88 to RM1.01 based on 8xCY24 earnings. Maintain a Sell call on the stock.

Source: TA Research - 28 Nov 2023