Pantech ... Oct10

It is set to announce its earnings results for the second quarter ended August 2010 later Nov 2010.

Pantech’s financial performance was affected by the global downturn, registering both a contraction in volume demand as well as lower selling prices for its products. However, sales and earnings have been on the mend, having bottomed in the second half of 2009.

Trading sales, in particular, dipped sharply — to as low as RM46.9 million in 4QFY10 having averaged around RM100 million per quarter in FY09 and 1HFY10 — on the back of a slowdown in contracts flow in the domestic oil and gas (O&G) sector.

But calls for fresh tenders from the national oil company, Petronas, have been slowly picking up pace. Trading sales improved to RM67.5 million in 1QFY11 and should rise further in the upcoming 2QFY11 results.

Meanwhile, export demand is also recovering well. Crude oil prices have rebounded convincingly from the lows during the height of the financial crisis and are currently (Oct 2010) trading above US$80 per barrel.

Indeed, Pantech’s export sales have been trending higher over the past three quarters — more than double in 1QFY11 to RM22.8 million from a low of RM10.3 million in 2QFY10.

Utilisation at its manufacturing facility is almost back to optimal levels but weakness in the US dollar is weighing on sales translated back into the local currency.

Looking further ahead, contributions from the its new manufacturing plant and increased spending in the domestic O&G sector will underpin growth over the next few years.

Industry players are upbeat that the actual flow of contracts and jobs will gather momentum going into 2011.

Pantech will be a beneficiary of increased capital spending. The company is one of the largest one-stop distributors of pipes, fittings and flow controls (PFF) products in the country with an extensive product range in excess of 20,000 inventory items.

The O&G sector is estimated to account for more than two-thirds of Pantech’s sales. Its second largest customer group is palm oil millers.

The company is already planning for the next two phases of expansion, which will extend its manufactured product range to include stainless steel fittings and eventually alloy-based pipes and fittings.

It estimates capex to top RM80 million per annum in FY11-FY13.

Pantech is in the midst of implementing a one-for-five bonus shares plus two-for-one rights issue of irredeemable convertible unsecured loan stocks (ICULS) to part-finance its expansion. The ICULS will come with free warrants on the basis of one warrant for every 10 ICULS subscribed.

Assuming full subscription, the exercise will raise RM75 million from the ICULS proceeds at the outset. Future conversion of the warrants will raise a further sum of up to RM45 million.

Upon full conversion of the ICULS and warrants, Pantech’s share base will be enlarged to about 650 million shares, from the existing 375 million shares. The larger share capital — in step with its growing business — would improve liquidity and should increase the stock’s attractiveness to investors over time.