Review

• Excluding the one-off gain of RM5.8mn, ANNJOO’s 1QFY24 reported a core net loss of RM21.7mn. The results fell short of our full-year earnings estimates of RM58.0mn but came above the consensus’ full-year net loss forecasts of RM45.8mn. The negative variance was mainly underpinned by lower-than-expected average selling price (ASP) and sales tonnages.

• ANNJOO’s 1QFY24 revenue slid by 3.4% YoY, chiefly due to lower ASP and weaker sales tonnage of various steel products. Despite this, the core net loss narrowed by 26.2% YoY, thanks to easing raw material and fuel costs.

• In contrast, 1QFY24 revenue grew 6.9% QoQ. We attribute this improvement to higher ASPs, despite a slight decrease in sales tonnage for the quarter. Consequently, the core net loss narrowed to RM21.7mn from RM37.6mn in the previous quarter.

Impact

• Following the weaker-than-expected results, we reduce our ASP and sales tonnage assumptions for FY24. Consequently, our FY24 earnings estimate is revised downward by 64.1% to RM20.8mn.

Outlook

• Despite persistent challenges stemming from subdued ASP and lower sales tonnage due to macroeconomic concerns, we maintain cautious optimistism that these external headwinds will gradually diminish in the 2HFY24. On a broader scale, the new tariffs imposed by US authorities on Chinese steel imports are expected to accelerate the global implementation of the China+1 strategy. ANNJOO is well-positioned to benefit from this shift due to its competitive pricing advantage.

• Additionally, the demand for steel products is anticipated to increase with the rollout of major domestic infrastructure projects, such as the Penang LRT, Johor ART, and Sarawak infrastructure initiatives. Moreover, we believe that ANNJOO’s shift towards a more spot market-driven raw material procurement strategy will boost gross profit margins, thereby enhancing overall profitability more effectively.

Valuation

• We believe ANNJOO will benefit from the spillover effect from the upcoming mega infrastructure projects, particularly the Penang LRT. Given its proven track record in large-scale infrastructure projects, we assign ANNJOO a higher target price-to-earnings ratio (PER) of 11x, anticipating a brighter earnings outlook. As a result, we arrive at a new target price of RM1.51 (up from RM1.11 previously). Upgrade ANNJOO to Buy.

Source: TA Research - 31 May 2024