This article first appeared in The Edge Financial Daily on August 30, 2019

Ann Joo Resources Bhd
(Aug 29, RM1.17)
Maintain underweight with a lower fair value (FV) of 73 sen: We cut our financial year 2019 forecast (FY19F–FY21F) net profit by 51%, 17% and 14% respectively, reduce our FV by 16% to 73 sen (from 87 sen previously) based on eight times revised FY20F fully diluted earnings per share of 9.1 sen.

Ann Joo Resources Bhd’s first half (1HFY19) results missed expectations. It reported a net loss of RM44.4 million, versus our full-year net profit forecast of RM44.6 million and full-year consensus net profit estimate of RM40 million.

Its 1HFY19 losses were mainly due to a steep drop in steel prices, averaging at only RM2,060 per tonne versus RM2,500 a year ago, higher-than-expected iron ore prices with an average of US$106 (RM488.38) per tonne versus US$63 per tonne in 1HFY18. Not helping either were the general weak demand for building materials and increased competition from a foreign-controlled steel producer in the local market.

The company guided for a soft third quarter (3QFY19F) mainly due to margin compression on the back of the even more depressed steel prices in the local market amid intensifying competition. Also, the input cost of iron ore remains high despite a respite since August on softening prices amid higher stock levels at certain ports in China.

The earnings downgrade is largely to reflect lower average steel price assumptions for FY19F–FY21F of RM2,050-RM2,200 per tonne (from RM2,100-RM2,300 per tonne previously). Meanwhile, we maintain our iron ore price assumption of US$90 per tonne and keep our flattish sales volume growth assumption of 0–1% against the backdrop of a muted outlook for the local construction sector.

We remain cautious on Ann Joo as its fortunes as a long steel player are inevitably tied to the construction sector, whose prospects have weakened. Given the still elevated national debt, the government has no choice but to remain steadfastly committed to fiscal prudence, which means the revival of the East Coast Rail Link project could be a “zero-sum game”, as it may impede the government’s ability to implement other public infrastructure projects. — AmInvestment Bank, Aug 29