Review

• Excluding extraordinary items totalling RM6.7mn, ANNJOO posted a core net loss of RM55.8mn in 1HFY24. The results fell short of our fullyear earnings forecast of RM20.8mn but exceeded the consensus full-year net loss projection of RM76.9mn. The underperformance was mainly driven by lower-than-expected average selling prices (ASP), coupled with reduced sales volumes across the steel product range and higher-thananticipated operating expenses.

• YoY, 1HFY24 revenue saw a modest decline of 2.0%, impacted by a drop in sales volumes for various steel products, despite an increase in ASP. As a result, the core net loss expanded by 13.7%, reflecting the pressure on profit margins due to lower overall ASP.

• QoQ, ANNJOO’s 2QFY24 revenue decreased by 8.8%, influenced by both lower ASP and reduced sales volumes. Consequently, 2QFY24 core net loss increased from RM21.7 in the previous quarter to RM34.1mn. Briefing Highlights

• The ongoing downturn in China’s property sector, coupled with weaker manufacturing activities, continues to weigh on steel demand, leading to a decline in ASP. The supply-demand imbalance is expected to persist in the near term, as there is a lack of strong economic stimuli amid ongoing production levels.

• Domestically, the market remains lacklustre due to slow progress in rolling out large-scale infrastructure projects amid ongoing macroeconomic challenges. Meanwhile, the growth of the data centre sector is unlikely to significantly boost the steel industry, as the complexity of data centres is more focused on mechanical and electrical (M&E) aspects, rather than structural steel requirements.

• On the upside, the group's financial performance is expected to improve gradually from 4QFY24 onwards, supported by a new spot-market-driven procurement strategy. This should allow ANNJOO to optimise its profit margins by capitalising on more advantageous pricing conditions.

Impact

• Following the disappointing results, we adjust our ASP, sales tonnage and cost assumptions for FY24/25/26F. As a result, we now expect the group to report a core net loss of RM63.1mn in FY24. However, we forecast a turnaround, with profits of RM62.9mn in FY25 and RM72.1mn in FY26. For comparison, our previous net profit projections for the respective years were RM20.8mn, RM76.8mn, and RM86.0mn.

Outlook

• Given the recent sharp decline in global steel prices, we anticipate that ASP will remain under pressure for the next few quarters, despite a slight improvement in profitability driven by the new procurement strategy. Global market uncertainties, driven by geopolitical tensions and the absence of a robust stimulus package from China, will likely continue to hinder the recovery in steel demand.

• However, we hold a cautiously optimistic view for FY25, largely due to the anticipated launch of the Penang LRT project, where ANNJOO is well-positioned as a key supplier. The group’s competitive pricing and strong market position should provide an advantage. Additionally, the revitalisation of the property sector, with more high-rise project launches and increased construction activity, should bolster demand for steel products.

Valuation

• Following the earnings revision, we reduced our target price to RM1.35 (from RM1.64 previously), based on 12x CY25 earnings. We continue to like ANNJOO for the following reasons: (i) ANNJOO stands to be the biggest beneficiary as the key supplier of steel materials for the Penang LRT project, supported by its cost competitiveness from its steel-making plant in Prai, Penang, (ii) increasing construction activities from the revitalisation of the property sector are driving higher demand for steel products, and (iii) the upgrading of the power grid, in line with TNB’s NETR goals, further boosts demand for steel products. Maintain Buy call on the stock.

Source: TA Research - 30 Aug 2024