Results

• Improved earnings – Pantech’s 2QFY18 net profit grew more than double YoY to RM11m on the back of higher revenue and improved margin. Quarterly revenue increased 51% YoY to RM157.1m due to higher demand from RAPID, Pengerang and improved overseas demand.

• Both divisions improved – Revenue from the Trading division surged 30% YoY to RM84.1m mainly due to increased orders from RAPID while sales from the Manufacturing division improved 86% YoY to RM73m due to higher demand from overseas especially shale operators in the US.

• Slower QoQ - 2QFY18 revenue was slightly higher after rising 3.7% QoQ as Trading revenue dropped 9.8% QoQ while Manufacturing revenue climbed 25% QoQ. However, net earnings dropped 17% QoQ on higher tax rate and lower margin.

• Lower margins – Operating margin decreased to 10.8% from 12.8% in 1QFY18. Similarly, net margin was lower at 7% from 8.8% in 1QFY18 due to the unfavourable product mix by the Manufacturing division. Despite higher tax rate of 23.8% (vs 22.2% in 1QFY18), Pantech’s tax rate is still below statutory rate due to tax incentive enjoyed by its subsidiary.

• Second interim dividend declared – Pantech has declared a second interim dividend of 0.5 sen, taking total dividend so far to 1.5 sen. We expect full year dividend of 2.5 sen, translating into a yield of 3.8%.

Earnings Outlook/Revision

• Earnings within expectation – Six months’ net profit accounted for 60% of our full year estimate while first half revenue achieved 57% of FY18 forecast.

• Earnings estimates maintained – We are keeping our FY18 and FY19 forecasts with expectation that earnings will continue to be boosted by RAPID and start-up losses in its new galvanising plant will ease.

Valuation & Recommendation

• Downgrade to HOLD from BUY call with an unchanged target price of RM0.70 following the recent run-up in share price. Our target price is based on FY18 EPS forecast and PER of 13x times after applying +2 standard deviation over its mean PER due to the stabilised conditions in the oil and gas sector.

Source: JF Apex Securities Research - 25 Oct 2017