ANNJOO: Earnings Underperform Expectations Amid Persistent Margin Pressure

An investment bank research report reveals a challenging financial period, with a company reporting a 9MFY25 core net loss that significantly exceeded analyst expectations. The underperformance was primarily attributed to a persistent struggle with weak average selling prices (ASPs) and increased losses within its green technology division, signaling ongoing market headwinds.

Performance Review

For the first nine months of FY25, the company recorded a core net loss of RM187.1 million. This figure surpassed both the bank’s own full-year loss forecast of RM135 million and the street’s estimate of RM181.5 million, indicating a deeper challenge than anticipated. This substantial loss followed a 13.4% year-on-year contraction in revenue to RM1.66 billion, primarily due to softer sales tonnage and ASPs across all product categories.

However, quarter-on-quarter, revenue saw a 9.6% improvement, leading to a narrower core net loss of RM40.0 million in 3QFY25, a reduction from RM68.9 million in the preceding quarter. This improvement was partly buoyed by better operating margins, which helped cushion the impact of a generally weaker ASP environment.

Market Challenges and Outlook

Management highlighted that the operating environment is likely to remain challenging, weighed down by a combination of geopolitical tensions, tighter global financial conditions, and a slowdown in the Chinese market, further exacerbated by tariff uncertainties. The local steel sector continues to grapple with excess production capacity from China and other major markets, which has suppressed steel prices both internationally and domestically. The ongoing property sector downturn in China also continues to curtail construction activity and limit steel demand.

Despite Beijing’s anti-involution measures providing some stability to steel prices since July 2025, a meaningful recovery in pricing and margins has yet to materialize. Consequently, profitability is expected to remain subdued until a sustained rebound in steel demand and pricing is observed. Domestically, while robust infrastructure spending under the 13th Malaysia Plan, totaling RM430 billion, is anticipated to support medium-term steel demand, near-term visibility is constrained by uncertainties over project rollouts. Furthermore, the planned introduction of a carbon tax in 2026 is expected to introduce additional compliance and operating cost pressures, though it may also spur investment in greener, energy-efficient steel solutions.

Strategic Initiatives

In response to the challenging operating environment, the group is pursuing a series of strategic initiatives to unlock value, strengthen its balance sheet, and support long-term growth. These include monetizing 135.53 acres of prime freehold industrial land in Prai, Penang, for RM800 million, with proceeds earmarked for working capital and future expansion. The company also plans to expand into steel-adjacent businesses through downstream integration in the automotive supply chain for value-added steel products and vertical integration into engineering and infrastructure projects within the electrification sector. Additionally, it aims to explore regional steel demand, including Singapore, and enhance its existing industrial property portfolio. These initiatives collectively aim to diversify revenue streams, improve operational resilience, and position the group for sustainable growth amid ongoing sectoral and macroeconomic headwinds.

Valuation and Recommendation

Given the prolonged underperformance and continued weakness in steel’s average selling price, the investment bank has revised down its target price for the company to RM0.64, from RM0.76 previously. This adjustment is based on a lower target Price-to-Earnings Ratio (PER) of 10x, down from 12x. Accordingly, the recommendation for the stock has been downgraded from Hold to Sell. The more conservative valuation reflects persistent margin pressure from weak steel prices, challenging global uncertainties, and a slow recovery in key end markets, justifying a more prudent risk-adjusted earnings profile.