Annjoo: Earnings Soared

Results Update

For QE30/6/2016, Annjoo's net profit rose 16-fold q-o-q to RM92.4 million on the back of a 19.4%-increase in revenue to RM585 million. The increase in revenue is mainly attributable to recovery in selling prices of various steel products. Higher profitability was mainly attributable  to volatility in selling prices and an improved cost structure derived from its investment in the hybrid BF-EAF technology. Annjoo expects its financial performance to "remain satisfactory for the remaining period of 2016. However, the Group’s profitability is still largely dependent on the effectiveness of the Chinese government (effort) to eliminate steel overcapacity as well as Malaysian government (effort) to curb the imports of steel products into Malaysia."

Table 1: Annjoo's last 8 quarterly results

Annjoo could be coming into a sweet spot in term of its financial performance. In the past 10 years, there was one brief period of abnormal profit, that was in 2008. In that year. it chalked up big profit for 3 quarters. That was also the time when its share price went skyrocket to about RM4.00.


Chart 1: Annjoo's last 42 quarterly results

Valuation

Annjoo (closed at RM1.64 yesterday) is now trading at a Price/Book Value of 0.88X (based on NTA of RM1.86 p.s.). Despite the oversized earning, Annjoo is still sitting on losses per share of 6.4 sen for the past 4 quarters.Thus, we cannot compute a meaningful PER for the stock.

Industrial Outlook

In the last report, I highlighted that iron ore prices had tumbled after the rally in March/April. I thought the recovery in the steel sector had stalled. Looking at the chart below, we can see that the iron ore price chart is still climbing higher again. This means that iron ore prices could have bottomed in January 2016 and we could be in for a long but gradual recovery in the prices of iron ore and steel products. Let's wait and see.


Chart 2: Iron Ore 6-year price chart as at July 2016 (via Vale.com) 

Technical Outlook

Annjoo rallied after it broke above the long-term downtrend line, RR at RM1.20 in July. It has just surpassed the horizontal line at RM1.45. Its next resistance will be at the psychological RM2.00 mark and then the horizontal line at RM2.20.


Chart 3: Annjoo's monthly chart as at Aug 15, 2016 (Source: ShareInvestor.com)

Conclusion

Based on improved financial performance, potential bottom in steel product prices & bullish technical outlook, I have revised my rating for Annjoo from TAKE PROFIT to a long-term BUY.

Note:

I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.