Journey to Wealth
Pantech Group - Making a comeback
We visited Pantech Group Berhad ('Pantech') recently and were impressed that its current operations are now on better footings. The main drivers of the improvement are 1) better stainless steel manufacturing operations and 2) new earnings contribution from the just acquired Nautic Steels (in Mar-12). Meanwhile, the catalysts for future earnings will be 1) sustained profitability for the stainless steel division and 2) further growth in the offshore segment (which will be mainly driven by Nautic Steels). Management is comfortable to achieve the FY13 consensus estimate of RM52m. For FY14, the consensus is estimating a net profit growth of 18.6% to RM61m. Assuming a 9x targeted PER on CY13 EPS of 9.2sen, the fair value for the company could be at least 83 sen.
Improved earnings. Pantech's earnings have been on an upward trend since 3QFY12 as both its trading and manufacturing divisions have recovered after a sluggish 1HFY12. The improvement can be seen from the company's 1QFY13 results of a net profit of RM12.5m, which is double that of 1QFY12 (net profit of RM6.2m) and 16.7% up from 4QFY12 (net profit RM10.7m).
Trading division. The trading division was hit by low demands from 3QFY11-2QFY12 as there was a slowdown in domestic oil and gas contracts during most of 2010. However, with the increased number of projects (e.g. the Malacca regassification project) in 2011, there has been a steady improvement in the demands. In our opinion, the division should remain buoyant as the oil and gas sector will continue to see an influx of projects ahead given that it is one of the 12 National Key Economic Areas for Malaysia ('NKEA').
Manufacturing division. The carbon steel facility (Pantech's original manufacturing division) is at 100% capacity utilisation and currently has an order backlog that will last until Apr-13. The stainless steel division (which kickstarted from May-11) is slowly gaining traction and management expects it to break even by year-end. To recap, the new facility was the main cause of the low EBIT earnings and losses for the manufacturing division in 2Q-3QFY12.
Further growth with foreign acquisition. The company's latest purchase of Nautic Steels (in Mar-12) allows Pantech to break into new product ranges as well as the international markets. Nautic Steels specialises in pipe fittings and flanges that cater to the harsh offshore environment. The products are sold in both Europe and Asia and are approved by Saudi Aramco and Petrobras. Management is guiding for a net profit contribution of around RM5m for the year and expects Nautic Steel's market share to grow as it injects a new vigour into the operational processes of the company.
Better 2QFY13 results. As a result of the factors above, management is comfortable that it can rake in a FY13 net profit of at least RM52m (in line with the consensus estimate). This implies a better 2QFY13 earnings of around RM13.5m (from 1QFY13 earnings of RM12.5m).
Valuation. FY13-14 net profit consensus estimates for the company are RM52m and RM61.7m respectively, which imply a CY13 diluted EPS (the company has ICULS and warrants) of 9.2 sen. Assuming a 9x targeted PER (which is a 1.5x premium to our targeted PER ascribed to Uzma given Pantech's larger share base and higher net earnings), a possible fair value for the stock is 82.9 sen This implies a total return of 26.6% upside at its current share price.
Source: Kenanga
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This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
