Pantech ... Jul12

- Sales up 52.3% y-y and 13.1% q-q
- Net profit doubled y-y and up 16.7%q-q to RM12.5 mil
- Expect strong double-digit growth in FY13-FY15
- FY13E P/E of only 5.1x with estimated 7.5% net yield

Pantech Group Holdings’ earnings results for 1QFYFeb2013 were ahead of our expectations.

The company reported a strong start to its financial year ending February 2013. Turnover was up 52.3% y-y and 13.1% q-q to RM145.2 million, with improved activities in both the trading and manufacturing arms.
Trading sales totaled RM90.2 million, up 38% y-y, accounting for about 62% of total turnover.

Meanwhile, manufacturing sales jumped to RM55.1 million, from RM30.2 million in the previous corresponding quarter. Sales included maiden contribution from UK-based Nautic Steels, which was acquired at the beginning of the current financial year.

Both the company’s carbon steel and stainless steel manufacturing plants are running near capacity on the back of strong demand. Whilst the latter is still in the red, losses were much smaller than that in the preceding quarters – and were more than offset by earnings from the carbon steel plant and Nautic Steels. The manufacturing arm reported earnings before interest and tax (EBIT) of RM5.4 million, compared with RM1.3 million in 1QFY12.

Net profit totaled RM12.5 million in 1QFY13, double the RM6.2 million reported in 1QFY12 and 16.7% higher than the RM10.7 million made in 4QFY12.

Gearing and net assets stood at 37% and 78 sen per share, respectively. The company proposed an interim dividend of 1 sen per share. The stock will trade ex-entitlement October 5th. Before this, the stock will trade exentitlement for final dividends of 1.3 sen per share September 3rd.

Pantech’s latest 1QFY13 earnings result reaffirms our upbeat outlook for the company.
Despite prevailing uncertainties on the global economic outlook, demand for the company’s pipes, fittings and flow control (PFF) products – in both the domestic and overseas markets – remains buoyant underpinned by continued spending in the oil & gas industry. This will likely remain the case barring a major downside shift in the global economy.

On the domestic front, national oil company, Petroliam Nasional intends to spend some RM250 billion over five years, to develop new projects, including new deepwater and marginal oil fields, as well as undertake enhanced oil recovery from existing oil fields. Contracts have begun to flow and would gradually filter down to the downstream support services and equipment.

With an extensive range of over 22,000 product items of various sizes, grades, types, categories and brand names, Pantech provides its customers a one-stop solution for the transmission of fluids and gases.
Sales at its trading arm, which caters primarily to domestic demand, have been gaining traction, especially in the last two quarters. The manufacturing arm, which caters primarily to the export market, has also
been doing well. Crude oil futures on the New York Mercantile Exchange are currently hovering around US$90 per barrel, a level that remains supportive of exploration and production activities in the oil & gas sector.

Pantech’s order book for its carbon steel PFF products now stretches right up to April 2013. The new machineries acquired earlier this year, to manufacture high frequency induction long bends, have been up and
running. Indeed, all the lines are operating at full capacity.

The company is adding one more line at its manufacturing facility in Klang that will raise capacity by 1,500 tonnes per annum. Currently, total production capacity stands at some 16,500 tonnes. The new line is expected to commission by October 2012.

Additionally, the underlying strength in demand has allowed Pantech to raise selling prices, by about 7-15%, for its products. Impact from the higher prices will be gradually evident over the next few months as new orders are delivered – and should be reflected in the company’s 2HFY13 earnings. As it is, we expect both sales and net profit to strengthen further in 2QFY13, from the first quarter’s results.

Meanwhile, the order book for stainless steel pipes and fittings is full for the next three months. The plant in Johor is also running near full capacity. About half of the output is sold in the domestic market, substituting products previously sourced externally by the trading division. The remainder is exported.

The company has now commissioned all ten production lines, from the initial six, bringing total capacity to 12,000 tonnes per annum. The final line, to manufacture larger sized pipes, only just started production.
The stainless steel plant was loss-making in FY12, due to start up expenses and initial production hiccups. But following a steep learning curve, losses have narrowed significantly in 1QFY13. At this pace, it is likely to breakeven in 2HFY13 and should contribute positively in FY14.

Operations at newly acquired UK-based manufacturing outfit, Nautic Steels too are going to plan. Recall that Pantech bought over the company in early- March 2012 for some GBP9.2 million. As mentioned above, the unit is already profitable and had contributed positively to earnings in 1QFY13.

Nautic specializes in niche market PFF, including high value copper nickel, duplex and super duplex stainless steel and other alloy products. These products are widely used in highly corrosive, acidic, salt saturated water and high temperature environments such as marine oil industry and water desalination plants. More importantly, Nautic’s products are approved by most of the oil majors such as Aramco, Petrobras, Qatar Petroleum, BP and Shell.

The acquisition complements Pantech’s existing range of carbon steel and stainless steel products – and will expand the company’s geographical reach and clientele.

Pantech has begun to re-jig Nautic’s production processes to optimize operations and enhance profitability. It is also in the midst of planning more machineries to cater to rising demand. Its customers are diverse, including from Brazil, the Middle East, Asia and Europe. The company is upbeat that it can improve on sales and margins by FY14.

Valuation and Recommendation
Based on prevailing operating conditions, Pantech is on track to achieve strong double-digit sales and profit growth over the next few years. The company targets to hit the RM1 billion mark in sales by 2015.

We estimate net profit of RM52.6 million in FY13, up 52% from the RM34.5 million recorded in FY12. Earnings are expected to expand further to RM64 million in FY14.

Based on our forecast, the stock is trading at very modest P/E valuations of only 5.1 and 4.2 times, respectively, for the two financial years. Pantech’s valuations compare very favourably against that for most oil & gas stocks listed on the local bourse – and the broader market’s average valuations – as well as against its own projected growth.

Plus, the stock is trading well below its net asset of 78 sen per share as at end-May 2012. With the gradual crystallization of its earnings growth, we believe the stock is due for a positive re-rating. Thus, we maintain our BUY recommendation on the stock.

Furthermore, Pantech has taken to paying quarterly dividends, giving shareholders a dependable income stream. The company proposed a first interim dividend of 1 sen per share. Net dividends totaled 3.5 sen per share in FY12, up from 3.3 sen per share in the previous financial year, including the as yet unpaid final dividend of 1.3 sen per share.

In view of the company’s stronger earnings, we estimate dividends will rise to 4.5 and 5.5 sen per share in FY13-FY14. This will earn shareholders an attractive net yield of 7.5-9.2% at the current share price.