Annjoo Q2 2019 Review

Annjoo reported its new Q2 result with a net loss of RM37.75mil on the back of higher revenue of RM574.32mil. This result is definitely shying shareholders away. Sadly, no dividend was issued in this quarter, understanding that the group is having a challenging business condition.

Higher revenue in the second quarter of 2019 (“2Q2019”) and first half of 2019 (“1H2019”) was
mainly due to higher export tonnage sold. International and domestic selling prices remained
depressed, and domestic demand continued to be weak. The revenue has increased 12% (YoY) and 6% (QoQ).

However, operating expenses for this quarter has badly hurt the company profit. In the report the group has mentioned that:
Losses in 2Q2019 and 1H2019 were mainly attributable to:
i) Lower selling price coupled with rising raw material and fuel costs;
ii) Higher-than-usual production cost in 2Q2019 due to the scheduled Blast Furnace (“BF”)
shutdown; and
iii) Other costs in 2Q2019 including allowance for inventories written down of RM22.54 million
and overhead cost for plant temporary shutdown on the BF relining exercise and plant
upgrading activities amounted to RM4.98 million.

We can see that moving forward, the expenses will reduce significantly in coming quarters. So far, those expenses were just one off maintenance process. 

Looking back on FY 2015 where steel sector was in the down trend as steel market was flooded with china imported stocks, Annjoo had written down inventories. History happens again. We can observe that, when inventories start stacking up, it is no good to the company and it means the market is going to slow down.

  

Looking on the group cash flows performance, net cash flows from operating activities have slightly improved from -RM46.6mil to -RM1.9mil comparing to Q1 FY19. It might be the net change in current assets that cushion the loss in operating activities.

The group's prospects continues to depend on the outlook of the international and domestic demands. The management has forecast that the third quarter of 2019 is expected to be remain challenging due to the uncertainty of global economic and lacklustre in construction market locally. The group is still in talk government to resolve the issue facing by the steel industry due to competition with foreign owned local steel makers.

Comment:
It is definitely not a good time to invest in steel industry stocks. However, I believe the market has bottomed out, price would not go low any further. The recent decline in key raw material prices, particularly iron ore and coking coal, will drive lower production cost going forward. The news of the revival of mega infrastructure projects and government action to resolve the current challenges would be catalysts for the stock price.

Technical Analysis

 The stock price is moving in a bearish trend. No signal of rebound. Next support line will be around RM1.16