Earnings declined YoY – Pantech’s 3QFY17 net profit dropped 45% YoY to RM6.1m on the back of lower revenue as quarterly sales dropped 31% YoY to RM99.1m due to decreased demand from the oil and gas industry.
Lower revenue from both divisions – Revenue from the Trading division dropped 38% YoY to RM59.1m while sales from the Manufacturing division decreased 17.6% YoY to RM40m.
Margins pressured – Due to competitive pricing, operating margin declined to 10.1% from 11.7% in 3QFY16. Similarly, net margin declined to 6.2% from 7.7% in 3QFY17.
Improved QoQ earnings – Net earnings increased QoQ due to lower tax rate and increase in other income as revenue from Trading division dropped 8.3% QoQ while sales from the Manufacturing unit was 1.6% QoQ higher. As a result, quarterly revenue declined 4.6% QoQ while net profit increased 21.5%. The improvement was also reflected in higher profit margins QoQ.
Third interim dividend declared – Pantech has declared a second interim dividend of 0.3 sen, taking total dividend so far to 1.3. We expect full year dividend of 1.5 sen. This translates into a yield of 3.2%.
Earnings Outlook/Revision
Earnings below expectation – Nine months’ net profit accounted for 57% of our full year estimate due to lower margin while six months revenue achieved 63% of FY17 forecast.
Earnings estimates reduced – We are slashing our FY17 and FY18 net profit forecasts by 18.6% and 16.4% respectively. Sales forecasts for FY17 and FY18 were also reduced by 18% and 8% respectively.
Valuation & Recommendation
Downgrade to Hold call with a lower target price of RM0.51 (from RM0.615 previously). Our target price is based on FY18 EPS forecast and average PER of 10x times for local steel and pipe companies.
Earnings growth hinges upon the progress of RAPID, Pengerang as Pantech, a major supplier of pipes, valves and fittings (PVF), has a high chance of securing orders from the development.
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