A slump in export numbers and inventory writedowns dragged 1H13 performance. At 94% of our full-year forecast on an annualised basis, the results were in line as 2H should improve. A slight recovery in steel rod prices is positive but regional macro concerns present risks.
We cut our target price as we apply a lower CY14 target P/E of 10.9x (12.5x before), the lower end of its 3-year historical average and a higher 30% discount (20% prev.) to our target market P/E of 15.6x in view of rising macro concerns. Dumping issues could persist in 2H while global concerns may continue to curtail export numbers. Cost efficiency should support a slight recovery in 2H earnings. Maintain Neutral.
2Q was hit by inventory writedowns and unrealised forex losses amounting to RM10.6m. Annualised 1H13 core net profit made up 94% of our full-year forecast but was 10% above consensus. The results were in line as we expect 2H to improve on the back of sustained cost efficiency and resilient domestic demand. Revenue declined 19.4% yoy in 1H13 as exports slumped. Export tonnage dropped 78% qoq to 5k tonnes , stoked by depressed international prices for billets, which fell below breakeven levels in May. This is negative for the group as exports present a natural hedge for its US$-denominated debt exposure.
Dumping continues but rod prices are up
There have yet to be any policy drivers in China to remedy the oversupply situation. This means that the dumping of steel wire rods could persist in 2H. This is offset by resilient domestic demand, which drove domestic steel wire rod prices closer to c.RM2k/tonne, relatively at parity with that of steel bars.
Macro concerns loom
Regional macro concerns present extended risks to Ann Joo as it means that the expected recovery in export prices in Sep-Oct may be capped. Management will continue to optimise cost and this should support some earnings recovery in 2H.
The group held a results briefing for over 10 sell-side analysts. Management was represented by group managing director Dato' Lim Hong Thye. Issues surrounding the dumping of steel wire rods by China's major producers remained as China's oversupply situation looks likely to persist in the medium term. However, domestic demand over the past six months has closed the gap between the domestic selling prices of steel wire rods and that of steel bars. Prices of steel wire rods, which historically trade at a premium over that of steel bars, are now relatively at parity with steel bars at around RM2.2k/tonne. This was a slight positive surprise but does not indicate a sustained recovery as lobbying against the 5-year anti-dumping duty continues. Indications were that China's steel production capacity rose c.10% in 1H13, with China's export levels consistently above 5m tonnes.
Exports slumped in 2Q
Regional macro issues caused Ann Joo's export numbers to slump in 2Q13. Export tonnage dropped 78% qoq from 23k tonnes in 1Q13 to 5k tonnes in 2Q13. International prices for billets, especially, have been below breakeven levels since May-13. This is negative for the group as exports present a natural hedge for the group's US$-denominated debt exposure. There are some positive indicators going into 2H but it will all depend on the performance in 3Q. As at Aug, export prices for billets have improved to above breakeven levels. Management hopes that these levels can be sustained as global construction activities are historically most active in Sep-Oct.
Cost is still manageable but offset by regional concerns
Management will continue to optimise cost given uncertainties surrounding the China dumping issue and the weak export market. This should support some earnings recovery in 2H but Ann Joo is now facing challenges on the global front. Regional macro concerns have escalated since about a week ago. This could curtail the likely recovery in exports as export demand could stay depressed over the medium term. The negative macro outlook is offset by domestic demand, which remains resilient going into 2H.
Publish date: 30/08/13