KUCHING: Ann Joo Resources Bhd (Ann Joo) recorded a net profit of RM5.5 million in 1QFY16 on the back of a recovery in steel prices and reversal of inventories.
The recent steel prices rally with more significant upward movement in March and April this year was due to temporary shortage of steel which have started to correct with prices adjusting downwards, according to the team at MIDF Amanah Investment Bank Bhd (MIDF Research).
“A marginal net profit of RM5.5 million was recorded in 1Q16 versus 4Q15’s net loss of RM47.7 million.
This was largely due to a reversal in inventories previously written down of RM18.47 million as steel prices recovered in 1QFY16,” it said yesterday.
To note, steel prices moved up after Chinese New Year this year with a stronger price surge in March and April 2016.
The upward movement was fuelled by a temporary shortage of steel as a result of restocking activities for a more active production.
This was after lull period of production due to the earlier weaker selling prices.
“We believe that the surge was also contributed by speculative activities in futures trading,” MIDF Research said.
“Hence, the upward price movement is not sustainable. The higher steel prices seen earlier have started to ease towards the end of April, and the price correction has extended into May 2016.”
The industry issue of overcapacity in China and high exports from China continue to persist, MIDF Research said, adding the recent recovery in steel prices has resulted in China suppliers cancelling their exports orders to the local steel mills resulting in temporary shortage which have caused domestic steel prices to surge.
“Steel prices are expected to remain volatile and price correction which has already started will continue into 2HCY16 until a stabilisation point where prices are supported by fundamentals of supply and demand.
“As such, the operating environment continues to be challenging. Although the China’s government has announced its plan to remove the excess steel production capacity in China by 100 to 150 million tonnes of crude steelmaking capacity over five years, we expect the reduction of production capacity to be slow as it will have a socioeconomic impact if it is done swiftly.
“Until further measures have been implemented to curb the steel overcapacity in China and the strong imports of steel bars into Malaysia, we do not expect the higher steel prices to sustain.
” In view of the 1Q recovery in steel prices, MIDF Research revised its net profit forecast for Ann Joo in FY16 to RM14.1 million from a loss of RM178.3 million previously.
“We maintain our sell recommendationwith an adjusted target price of RM0.85. We would advocate selling into strength from the earlier rise in share prices due to recovery in steel price. This is in view that the steel price correction has started and is expected to continue.”