This article first appeared in The Edge Financial Daily, on August 17, 2016.

Ann Joo Resources Bhd
(Aug 16, RM1.72)
Maintain market perform with a higher target price of RM1.69 from RM1.23. Ann Joo Resources Bhd’s first half of financial year 2016 (1HFY16) core net profit (CNP) of RM72.5 million came in above its and consensus expectations making up 107% and 426% of estimates respectively.

The positive variance was due to higher-than-expected margins from better-margin product mix, lower-than-expected raw material costs and lower-than-expected effective tax rate.

We derive our CNP after stripping off reversal of inventories written down to net realisable value of RM19.3 million and unrealised foreign exchange gain of RM5.7 million.

Second quarter of financial year 2016 (2Q1FY6) CNP of RM90.3 million improved sixfold quarter-on-quarter from 1QFY16 core net loss (CNL) of RM17.9 million, on the back of increase in manufacturing and trading revenues by 19.4%, and improvement in manufacturing division margin by 17.3 percentage points.

This was mainly driven by the recovery in steel prices and Ann Joo’s improved cost structure.

1HFY16 CNP of RM75.2 million increased 315% year-on-year underpinned by lower financing cost, and improved manufacturing and trading margins due to reasons stated above.

We note that Ann Joo has pared down RM437 million of debt in 2QFY16 driving its net gearing down to 0.8 times from 1.2 times previously.

We are turning positive on the outlook for the steel sector premised on several factors which are: i) China’s depleting steel inventory, ii) closure of loss-making steel mills in China, and iii) China’s government initiative in reducing steel production capacity coupled with Ann Joo’s construction activity set to pick up from a slow quarter due to the rainy season previously.

Post-results, we upgrade Ann Joo’s FY16 and FY17 estimated earnings forecast by 85% to 93% after adjusting for lower raw material prices, a higher USD-MYR rate of 4.1 and lower financing costs in view of pared down debt in 2QFY16.

Risks include lower-than-expected steel selling prices, softer-than-expected steel demand, and higher-than-expected raw material costs. — Kenanga Research, Aug 16