Kenanga Research keeps ‘underperform’ call on Ann Joo with RM1.57 target price

KUALA LUMPUR: Ann Joo Resources Bhd unexpectedly posted earnings turnaround in the fourth quarter of its financial year 2020 but the recent share price rally may have already overpriced its prospects, said Kenanga Research.

The research firm said Ann Joo posted a core net profit of RM17.3 million in the fourth quarter, which narrowed its full-year core net loss to RM54 million.

This was above its loss estimate of RM98 million and consensus loss estimate of RM103 million.

“For the upcoming quarter, Ann Joo’s earnings are predicted to be stronger quarter-on-quarter due to higher steel price and the lagging cost of goods sold effect from higher raw material prices.

“Based on the average selling price of RM2,675 per tonne, we anticipate the first quarter of its financial year 2021 to record core net profit of RM40 million,” it added.

Kenanga Research has kept its reservations for a bullish outlook as the rise in global long steel prices may have reached its peak, with supply tightness easing once more plants previously left idle ramp up production.

Kenanga Research said long steel demand arising from China’s construction activities might also gradually ease this year.

“Case in point, despite coming out from the winter months (December to February), which would see increased consumption of long steel, prices in China saw an initial spike early this month but have since plateaued and are gradually trending down.

“Unlike flat steel prices, which have been on an uptrend globally, we deduce that China’s construction steel demand may not be sustainable.”

Kenanga Research said the recent divergence of flat steel prices and long steel prices could also mean a margin squeeze for long steel producers.

With steel manufacturers consuming the same pool of raw materials (i.e. iron ore, scrap, coke), the huge demand for flat steel could mean elevated raw material costs, in which long steel producers might not possess the capability to pass through, it said.

The research firm raised its financial year 2021 earnings forecast to a core net profit of RM89 million and introduced a financial year 2022 core net profit forecast of RM67million.

“We maintain our ‘underperform’ call on Ann Joo with a new target price of RM1.57 from 77 sen previously, as we feel the recent share price rally may have already overpriced the prospects,” it added.