Posted on 24 Aug 2017
Ann Joo Resources Bhd’s first half of financial year 2017 (1HFY17) net profit came in broadly within expectations at 54% and 60% of our and consensus full-year forecasts respectively. Ann Joo’s second quarter of FY17 (2QFY17) net profit dipped by 69% and 61% year-on-year and quarter-on-quarter respectively to RM28.6 million, driven by the following: i) lower sales tonnage and average selling prices due to soft domestic demand, especially in the construction sector; the slower construction progress was attributable to foreign labour constraints and seasonal factors; ii) Ann Joo incurred higher finance costs due to recognition of redeemable convertible cumulative preference shares unwinding of a discount of RM1.57 million as well recognition of long-term incentive plan expense worth RM1.06 million; iii) exceptionally high earnings in 2QFY16 driven by high sales tonnage and a sharp spike in steel prices followed by the Chinese government’s reforms to shut down excess capacity; and iv) profit margins declined due to high operation costs caused by the surge in fuel and raw material prices in 1QFY17. However, operational flexibility via hybrid blast furnace-electric arc furnace production technology resulted in better margins compared with its peers in the industry.
Ann Joo’s earnings visibility remains good, underpinned by: i) ongoing structural reforms in China to curb steel production, particularly eliminating induction furnaces, thus allowing Ann Joo to capitalise on the export market in Asean (which currently relies largely on steel supply from China); and ii) infrastructure projects locally to kick off in 2HFY17, resulting in better demand for construction steel. — AmInvestment Bank Research, Aug 23
