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Thursday, March 10, 2016

Annjoo: Opportunity Calling?

Results Update

For QE31/12/2015, Annjoo's net loss dropped 42% q-o-q but rose more than 5-fold to RM47.7 million while its revenue rose 27% q-o-q but dropped 16% y-o-y to RM414 million. Revenue increased q-o-q mainly due to higher sale tonnage of both Manufacturing and Trading Divisions. LBT dropped q-o-q mainly due to net reversal of inventories written down to NRV amounted to RM3.71 million in 4Q15 against inventory written down to NRV value of RM51.48 million as well as net forex exchange loss of RM6.77 million in 3Q15. As such, Annjoo's "improved" performance was nothing to shout about. [Note: Annjoo's results for QE31/12/2015 was announced on Feb 25.]


Table 1: Annjoo's last 8 quarterly results


Chart 1: Annjoo's last 39 quarterly results

Financial Position

Annjoo's financial position as at 31/12/2015 is considered weak with current ratio at 0.9X while total liabilities to total equity was elevated at 1.6X. Inventory holding period was rather long at 188 days (compared to LionInd's inventory holding period of 81 days). Its receivable collection period is better at 60 days (compared to LionInd's 85 days). 

Valuation

Annjoo (closed at RM0.715 yesterday) is now trading at a Price/Book Value of 0.4X (based on NTA of RM1.85 p.s.). With losses per share of 8 sen for the past 4 quarters. Annjoo has a negative PER.

Industrial Outlook

The steel sector has a rather eventful week. Firstly, a few steel products importers were raided by custom officers as part of the government's efforts on curbing illegal imports of steel products, particularly hot-rolled coils (HRC). Most of these importers belong to the Malaysian Iron & Steel Industry Federation. Three of Annjoo's subsidiaries, namely Ann Joo Metal Sdn Bhd (AJM), Anshin SteelService Centre Sdn Bhd (ASSC) and Anshin Steel Processor Sdn Bhd (ASP), were among the ten companies raided. For some of the companies affected, documents were taken away and bank accounts were frozen. No mention was made whether Annjoo's subsidiaries were among those companies whose bank account were frozen nor having their documents seized. For more, check out this article from klse.i3investor.com.
 
At the same time, prices of iron ore spiked up worldwide on higher demand from China. According to Business Insider, the reasons for the sharp rise in iron ore prices are:
  • Steel prices in China are climbing ahead of the construction season, leading to a surge in demand for iron ore 
  • The traditional restocking after Chinese New Year lifted the iron ore price somewhat in February but uncertainty about demand has kept it subdued until now, so the restocking element is still in play, and
  • A major steel producing city in the northern province of Hebei, Tangshan, will host the 2016 international horticultural exposition from late April through to October 16 this year, and authorities want to deliver a smog-free environment for visitors.

Chart 2: Iron Ore 1-year price chart as at Mar 2016 (Source: Business Insider)

Over the next few weeks or months, we may see further increase in the prices of steel products in line with higher prices for imported products from China. In addition, the recent raid on steel product importers, probably part of the investigation from the claim made by Mega Steel that Chinese steel producers are dumping their products in Malaysia, may lead to anti-dumping measures instituted against Chinese steel products. This could translate to another round of price hike. Higher selling prices for steel products - from either global demand or anti-dumping measures instituted - should be good news for Annjoo.

Technical Outlook

Annjoo's share price took a severe beating since it peaked in 2008 at RM4.20. At the current price of around RM0.70, the stock is trading not too far from its all-time low of RM0.50. Despite the jump to RM0.70 in the past 2 days, there is no sign yet that the share price is about to lift off.


Chart 3: Annjoo's monthly chart as at Mar 9, 2016 (Source: ShareInvestor.com)

Conclusion

Despite poor financial performance and bearish technical outlook, Annjoo is a good stock to consider for long-term contrarian investing. The tough operating environment for Malaysian steel producers - due to cheap imports - is about to improve. Despite a weak financial position, Annjoo is one of the best bet in the steel sector as it's a very well-managed group. At the current price, Annjoo has factored in all the negatives; making the stock a possible multibagger once the gloom & doom scenario is lifted.

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, Annjoo.

4 comments:

william ng said...

Hi Alex,
A great contrarian call on ANNJOO here.What do you think about LIONIND?Though there's still some earnings risk,it's P/NTA looks appealing.Do appreciate your comments.Thanks in advance.

Alex Lu said...

Hi william ng

I actually wanted to make contrarian call for 2 steel stocks: ANNJOO & LIONIND. I changed my mind because of the challenges facing the entire LION group.

Nonetheless you should note that LIONIND is quite different from Megasteel, the sick one in the group. LIONIND is fairly healthy and is in fact carrying out share buyback. I think that it may be just as a good contrarian stock as ANNJOO.

william ng said...

Hi Alex,
Thanks for the prompt reply.Always good to know that there's someone for us to turn to whenever we are in doubt.A very good call on ANNJOO,spiking more than 20% despite the softness in the overall market.You could be one of the very few to note a light(hopefully not a train) in this sector.Keep up the good work!

Alex Lu said...

Hi william ng

Thank you for kind words.