Pantech ... Jan10

S&P Results Review & Earnings Outlook
• Pantech reported a slightly disappointing 3QFY10 (Feb) net profit of MYR11.7 mln (-31.9% YoY), on a 30.6% YoY decline in revenue to MYR92.2 mln. This takes cumulative 9MFY10 net profit to MYR40.1 mln, making up 71% of our previous FY10 forecast. Pantech also declared a second interim DPS of 1.5 sen which goes ex on March 23,
taking total DPS declared to date to 3 sen.

• The miss was solely due to slower-than-expected revenue growth vs. our assumption: 9MFY10 revenue for the trading division was flat YoY, while manufacturing revenue was down 46% YoY. On a QoQ basis, 3QFY10 trading revenue declined by 36% on slower new orders, while manufacturing revenue gained 51% off a low base.

• While revenue growth was disappointing, overall operating margin at 18% was within expectations. Operating margin from the trading division impressed at 20.6%, its highest-ever level since listing. Volatile manufacturing margins are a concern (segment operating margin declined to 6.8% in 3QFY10, vs. 16.3% in 2QFY10), but we
note that the segment factors little to overall profitability for Pantech in FY10.

• We expect a stronger showing in FY11, on continued demand for PFF solutions in line with an expected increase in O&G capital spending as the global economy recovers. We expect Pantech to ramp up its manufacturing operations in FY11 as well, following the lifting of antidumping duties on its products in August 2009.

S&P Recommendation & Investment Risks
• We retain our Buy call on Pantech Group, with an unchanged 12-month target price of MYR1.10. We have also trimmed our earnings forecasts for FY10 and FY11 by 8.4% and 0.9% respectively, to take into account lower sales achieved to date.

• 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 5.2x and 7.7x calendarized 2010 EPS respectively. Our target price includes a revised 4 sen DPS for FY10 (from 3 sen), and implies a 6.3x 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.