Results

• Lower profit – Pantech’s 2QFY20 profit after tax dropped 34% YoY to RM7.2m despite flat revenue at RM148m.

• Mixed performances – Revenue from the Trading division dropped 13% YoY to RM82.8m due to lower demand and delivery in local oil and gas projects. However, sales from the Manufacturing division increased 24% YoY to RM65.2m due to resumption of export of carbon steel butt welded fittings to the US after overturning a 183% anti-dumping tax imposed on Pantech.

• Margins squeezed – Operating margin was lower at 8.2% vs 11.5% in 1QFY20 due to higher manufacturing cost for the initial shipment of carbon steel to the US. Net margin was also lower at 5% from 8% in the previous quarter while tax rate inched up to 23% vs 20% in 1QFY20.

• QoQ decline - 2QFY20 net earnings decreased 36% QoQ on the back of a 2% QoQ gain in revenue. Trading revenue dropped 8% QoQ while Manufacturing division’s revenue rose 19% QoQ.

• Steady year – 6MFY20 net profit tumbled 27% YoY to RM18.4m on the back of a 10% revenue decline to RM293m.

• Dividend in shares declared – Pantech has declared an interim dividend of 0.5 sen/share, taking total dividend so far this year to 1 sen/share.

Earnings Outlook/Revision

• Below expectation – Six months’ net profit of RM18.4m achieved 34% of our full year estimate of RM54.6m while revenue was within forecast having accounted for 45% of our FY20 expectation.

• Earnings estimates maintained – We are keeping our revenue and EPS forecasts for FY20 and FY21 in anticipation that earnings from Manufacturing will improve as its carbon steel to the US gathers momentum.

Valuation & Recommendation

• Maintain Buy call with an unchanged target price of RM0.63. Our target price is based on FY20 EPS forecast and PER of 9x times.

Source: JF Apex Securities Research - 24 Oct 2019