Results

• 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.

Source: JF Apex Securities Research - 13 Jan 2017