CIMB Research yesterday maintained its trading buy call on ANN JOO RESOURCES BHD [] but slashed its FY09 earnings forecast for the steelmaker by 45% after assuming higher costs while maintaining sales volume and selling price projections.

“Our FY09 earnings upgrade in our 2Q results note was overly aggressive as we did not factor in higher input costs, especially scrap prices which could have a huge impact on the company’s margins… This lowers our estimate of the full-year net profit margin from 6.8% to only 4.8%,” CIMB said in a note yesterday.

Nonetheless, it still expects Ann Joo to turn in RM102.3 million net profit in 2H09, which suggest a full-year figure of RM65.7 million, given the RM36.6 million loss in 1H09.

“Outlook (for Ann Joo) remains good for 2H. We continue to expect demand for Ann Joo’s products to improve in 2H given the recent positive news flow on government pump-priming and CONSTRUCTION [] activities as well as a pick-up in export orders. It is particularly heartening that the company was the only big upstream player to return to the black in 2Q,” CIMB said.

“We maintain our trading buy recommendation given the prospects of government pump-priming, especially in Southeast Asia. Moreover, the completion of a blast furnace in 1H2010 will allow Ann Joo to produce a higher grade of steel and, at the same time, lower its production costs and enhance margins,” CIMB said.

Its target price is unchanged at RM3.09, still pegged to a 20% discount to the brokerage house’s target market earnings multiple of 15 times. Ann Joo remained CIMB’s top pick in the building materials sector.

Based on the favourable news flow in the domestic market, the company expects local demand to improve towards the end of this year. Local steel bar prices are already showing signs of an uptick. Average selling price has climbed from RM1,800 per tonne earlier this year to about RM2,100.

Apart from domestic demand, steel exports were also on the rise, said CIMB Research.

“Typically, the company derives about 20%-30% of its manufacturing revenue from the export market. However, export demand has been on the rise lately and orders are starting to pick up with Vietnam, Indonesia and Sri Lanka the key destinations,” said the research house.

 Ann Joo closed four sen higher at RM2.29 yesterday.


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