Results

• Flat profit – Pantech’s 2QFY19 profit after tax declined 1.3% YoY to RM10.9m amid lower revenue as quarterly revenue decreased 6% YoY to RM148.1m.

• Mixed performances – Revenue from the Trading division rose 14% YoY to RM95.6m while sales from the Manufacturing division declined 28% YoY to RM52.5m due to suspension of export of carbon steel butt welded fittings to the US following a 183% anti-dumping tax imposed on Pantech.

• Lower QoQ - 2QFY19 net earnings fell 23% QoQ on the back of a 17% QoQ decline in revenue. Trading revenue dropped 7% QoQ while Manufacturing revenue fell 30% QoQ.

• Improved 1H – Despite lower sales in the quarter, 1HFY19 net profit added 3% YoY to RM25m on the back of a 5.8% revenue growth to RM326.4m.

• Steady margins – Operating margin increased to 11.9% from 10.8% in 1QFY19. Similarly, net margin was higher at 7.3% from 7.0% in the previous quarter despite higher tax rate of 27% vs 24% in 1QFY19.

• First dividend declared – Pantech has declared an interim dividend of 0.5 sen. We expect full year dividend of 2.5 sen which translates into a yield of 5%.

Earnings Outlook/Revision

• Earnings within expectation – Six months’ net profit of RM25m achieved 48% of our full year estimate of RM52.6m while revenue accounted for 50% of our FY19 expectation.

• Earnings estimates reduced – Despite its results meeting our forecast, we are cautious of its 2HFY19 performance. As such, we are lowering our revenue and EPS forecasts by 22% and 24% for FY19 and 13% and 13% for FY20 respectively to account for the impact of suspension of export of carbon steel products to the US.

Valuation & Recommendation

• Maintain Buy call with a lower target price of RM0.63 (from 84 sen). Our target price is based on FY19 EPS forecast and lower PER of 12x times with a +1 standard deviation over its 3-year mean PER.

• Potential reversal - The management is using legal means to contest the US Department of Commerce’s decision to impose the anti-dumping tax. Pantech could enjoy a favourable outcome if the decision is reversed.

Source: JF Apex Securities Research - 25 Oct 2018