Ann Joo Resources - Extended Loss..

Ann Joo’s losses deepen in 2QFY12, resulting in a cumulative net loss of RM6m for 1HFY12, which was way below our and street estimates. We suspect the poor numbers are due to weaker steel prices and start up plus additional overhead costs from its new Blast Furnace (BF). Meanwhile, we are keeping our bearish view since: i) the gestation period on its BF, and ii) the grim outlook for the steel industry with the slowing Chinese economy adding pressure to the already pathetic steel prices. As we cut our projection to a loss of RM14.5m in FY12 and lower profit of RM70m in FY13, we lower our FV to RM1.42, based on 0.7x FY12 BV, or -1.5 SD of the stock’s historical trading range. Reiterate SELL.

Short term revival. Ann Joo extended its negative position into 2QFY12 with a loss of RM4.9m, widening its 1HFY12 cumulative losses to RM6m, which was way below our and consensus estimates. The figure included some items like unrealised forex gains, reversal of inventories written down to net realisable value and positive tax that have mixture of impacts to its bottomline. While we normally deem those items as continuous (not exceptional), we decided to make a quick back-of-the-envelope calculation which showed post adjustment 1H earnings returning to positive at RM4.1m, which is nonetheless still unexciting. We suspect the weak earnings can be attributed to poor selling prices and start up plus additional overhead costs incurred at its BF. 

All eyes on BF. The management guided that its BF operation has improved gradually, but there is still room for further enhancement. Meanwhile, we continue to think it is fair to assume that the company may need to undergo a gestation period in handling this first-of-its-kind furnace in the country. Meanwhile, the immediate cost reduction should come from the arrival of lower-priced iron ore and coke. In the absence of a proven track record, we prefer to see the actual cost savings materialize before fully incorporating any positive numbers into our earnings model.

Maintain SELL. We remain cautious on the overall steel industry outlook, given renewed concerns over the deepening economic conditions in some of the European Union countries. As it is, international steel prices have come under tremendous downward pressure which impacted 2Q export and likely to extend into 2H. Also, the implementation of “mega” projects under the Economic Transformation Programme (ETP), which would in turn spur physical steel demand, may take time – at least until the conclusion of the next General Election. Therefore, we are now expecting Ann Joo to record a loss of RM14.5m in FY12 and 28% lower profit in FY13 at RM70m. The disappointing results also prompted us to keep our SELL recommendation on Ann Joo with our Fair Value lowered to RM1.42 based on 0.7x FY12 BV or -1.5 standard deviation (SD) of the stock’s historical trading range.

Source: OSK