Pantech ... Apr10

S & P Results Review & Earnings Outlook

 Pantech Group reported decent 4QFY10 (Feb) net profit of MYR10.3 mln (-3% YoY), despite a 52.4% YoY decline in revenue to MYR66.5 mln. FY10 net profit of MYR50.4 mln was within our expectations. Pantech also declared a final DPS of 1.2 sen, taking full-year DPS to 4.2 sen, better than our previous forecast of 4 sen.

 After contracting in 3QFY10, revenue from the trading division fell a further 55% YoY and 33% QoQ due to lower sales volume. The manufacturing division on the other hand recorded a 26% QoQ sales growth, albeit still some 40% off the peak in FY09.

 The lower sales revenue was offset by higher operating margins (at 19%), boosted by a partial writeback of inventory writedowns taken in FY09. Assuming half of the FY09 writedown (totaling MYR9.2 mln) was written back, 4QFY10 adjusted operating margin would have shrunk to 12%, not a surprise given the lower asset utilization.

 While the drop in revenue is worrying, we believe investors should be looking ahead to FY11 given the rebound in oil prices and resumption in activity. We expect a stronger showing in FY11, in line with an expected increase in oil & gas capital spending as the global economy recovers. Pantech should also ramp up its manufacturing operations following the lifting of antidumping duties on its products in August 2009.

Recommendation & Investment Risks

 We cut our FY11 forecasts by 12%, to factor in potential delays to our original assumption of new orders given the lower than expected 2HFY10 revenue. As a result, we bring down our call a notch to Hold (from Buy), with a lower 12-month target price of MYR1.00 (from MYR1.10). We also introduce FY12 forecasts in this note.

 We continue to value Pantech on a sum-of-parts basis, pegging the value of its businesses to its trading and manufacturing peers, which now trade at an average of 6.0x and 8.4x calendarized 2010 EPS respectively. Our target price includes a revised 4.2 sen DPS for FY11 (from 4 sen), and implies a 7x multiple against its calendarized 2010 EPS.

 FY11 should see increased activities in the oil & gas services sector, judging from the flurry of contracts awarded by Petronas toward end-2009. We expect this, along with the opening up of new markets and a recovery in the export markets, to drive a recovery in Pantech’s earnings for FY11 onwards.

 Risks to our recommendation and target price include: higher-than expected costs and volatility for raw materials and crude oil, which would hamper contract awards and hit earnings through inventory pricing adjustments.