Review

• Stripping off a gain on bargain purchase of a subsidiary and other one-off items amounting to RM134.2mn, ANNJOO registered a FY23 core net loss of RM140.2mn. This was below ours and the street’s full-year net loss estimates of RM86.4mn and RM89.8mn, respectively. The negative variance was mainly due to lower-than-expected average selling price (ASP) and sales tonnages.

• YoY, the group logged a core LBT of RM197.5mn in FY23 compared to a core LBT of RM154.4mn in FY22, as revenue declined by 17.3% to RM2.5bn. The weaker earnings performance was chiefly due to subdued ASP and sales tonnages of various steel products as a result of sluggish demand recovery amidst structural overcapacity.

• QoQ, despite 4QFY23 revenue falling by 5.1%, the core net loss narrowed down to RM37.6mn from RM53.5mn in 3QFY23, thanks to improved operating margin resulting from the gradual normalisation of high raw material costs. Briefing Highlights:

• Despite input costs such as iron ore and coking coal continuing to weigh on the group’s operating margin, the group is cautiously optimistic that its profitability will improve gradually, supported by its ongoing costoptimisation strategies.

• The domestic long steel market remained subdued as there was no strong catalyst from the rollout of mega infrastructure projects last year. That said, the steel demand is anticipated to be driven by the restart of mega railway projects and robust property sector in Johor region in medium term.

• In FY23, softened steel demand and ASP were further exacerbated by China’s overcapacity issue stemming from the property crisis. Nevertheless, market confidence could be boosted by the RMB 1 trillion stimulus package initiated by the Chinese’ government to shore up the economy, potentially leading to increased demand for various steel products.

Impact

• Following the weaker-than-expected results, we lower our FY24F steel bar’s ASP assumption in view of the sluggish demand recovery stemming from global oversupply. Consequently, our FY24F net profit estimates are reduced by 17.7% to RM58mn.

• Meanwhile, we introduce our FY26F earnings forecasts, with a 12% earnings growth at RM86.0mn.

Outlook

• Following the stabilisation of raw material costs, we believe that the group’s margin should gradually improve over time. However, we remain wary about the prospect of the global steel market, as the ASP and demand may require a longer time to ramp up and restore the balance of demand-supply globally.

• Apart from that, the 2-year moratorium implemented by the Ministry of Investment, Trade and Industry (MITI), which allowed reassessments to address the numerous challenges the local steel industry faces, is believed to have a positive impact on the steel sector. This strategy is expected to improve the competitive landscape and benefit the existing steel players.

Valuation

• Rolling forward our valuation base year to CY25 earnings, we raise our target price to RM1.11 (from RM1.01), based on an unchanged target PER of 8x. Maintain a Sell call on the stock.

Source: TA Research - 29 Feb 2024