Results

• Improved earnings – Pantech’s 3QFY18 profit after tax grew 64% YoY to RM10m on the back of higher revenue. Quarterly revenue increased 58% YoY to RM156.6m due to higher demand from RAPID, Pengerang and improved overseas demand.

• Both divisions improved – Revenue from the Trading division surged 44% YoY to RM84.9m mainly due to increased orders from RAPID while sales from the Manufacturing division improved 79% YoY to RM71.7m due to higher demand from overseas especially shale operators in the US.

• Flat QoQ - 3QFY18 revenue was flat after losing 0.3% QoQ as Trading revenue added 1% QoQ while Manufacturing revenue dropped 2% QoQ. Net earnings dropped 9% QoQ on unfavourable trading mix and forex loss.

• Lower margins – Operating margin decreased to 9.5% from 10.8% in 2QFY18. Similarly, net margin was lower at 6.4% from 7% in 2QFY18 due to the unfavourable product mix. Pantech enjoyed a lower tax rate of 19.2% (vs 23.8% in 2QFY18) below statutory rate due to tax incentive enjoyed by its subsidiary.

• Third interim dividend declared – Pantech has declared a third interim dividend of 0.5 sen, taking total dividend so far to 2 sen. We expect full year dividend of 2.5 sen, translating into a yield of 4.4%.

Earnings Outlook/Revision

• Earnings above expectation – Nine months’ net profit accounted for 85% of our full year estimate while revenue achieved 87% of FY18 forecast.

• Earnings estimates lifted – We are raising our FY18 and FY19 EPS forecasts by 20% and 15% respectively with expectation that earnings will continue to be boosted by RAPID and exports to US shale operators. Revenue estimates are also increased by 15% and 12% for FY18 and FY19 respectively.

Valuation & Recommendation

• Upgrade to BUY from HOLD call with a higher target price of RM0.84 (from RM0.70) following our earnings revision and rollover to FY19 valuation.

• Our target price is now based on FY19 EPS forecast and PER of 12x times after applying +1 standard deviation over its 3-year mean PER due to the improved oil prices and sentiment in the industry.

Source: JF Apex Securities Research - 29 Jan 2018