We are reinitiating coverage on Pantech Group Holdings ('Pantech') with an OUTPERFORM call and a target price of 81 sen based on a target PER of 9x on its fully diluted CY13 EPS of 9.0sen. Pantech trades and manufactures pipes, fittings and flanges (PFF) - which are key components of fluid transfer systems - mainly to the Oil & Gas industry. We are forecasting a 3-year net profit CAGR of 21.2% based on several key earnings catalysts i.e. 1) an expanded domestic manufacturing capacity; 2) overseas expansion via acquisition of UK manufacturer ' Nautic Steels; and 3) ongoing O&G activities and projects which will help keep Pantech's trading unit buoyant.

Making a comeback?  Pantech recorded sluggish earnings from FY10-12 after hitting a peak in FY09. However, since 4QFY12, there have been improvements due to: 1) heightened oil and gas sector activities; 2) better inventory management; and 3) the recovery of Pantech's stainless steel operations. We expect these improvements to continue on the back of the vibrant oil and gas sector outlook for the near future (both domestically and globally) and capacity enhancements in its manufacturing segment. 

Nautic Steels a gateway to international opportunities. According to management, 50% of Nautic Steel's products go to Europe, 40% to Asia and 10% to the Americas. Thus, we expect this investment to: 1) enhance Pantech's global clientele; and 2) given the niche  nature of Nautic Steel products, to assist in enhancing its manufacturing division's margins going ahead. Pantech is already looking to purchase the land opposite the factory to enhance its capacity although management did not guide on the exact timing. We are projecting decent revenue and net profit contributions of GBP10m (c.RM49.1m) and GBP5m (c.RM5m) respectively for FY13.

Attractive FY13 dividend yields.  Assuming a forward dividend payout ratio of 30%, Pantech's FY13-15 DPS payout are 3.6 sen, 4.2 sen and 4.7 sen respectively, implying FY13-15 dividend yields  of 5.2%, 6.1% and 6.9%, respectively. This makes Pantech one of the higher dividend-paying oil and gas stocks within our coverage. As at 1HFY13, the company has already declared a DPS of 2.2 sen (vs. 1 sen in 1HFY12), which translates to a 28.8% dividend payout ratio. Historically, the company has a dividend payout above 40%.

Projecting a 3-year CAGR of 21.2%. We expect the company to record FY13-15E net profits of RM53.9m, RM62.8m and RM72.0m respectively on the back of: 1) a 15% p.a. growth in its trading division; 2) enhanced output from Pantech's manufacturing plants; and 3) improved margins from the manufacturing plant as its stainless steel plant continues to gain traction. 

The operational risks include:  1) foreign exchange exposure risks as Pantech's business is exposed to multi-currencies (especially the SGD, EUR, GBP and USD); 2) swings in its raw material cost on account of the fluctuation in steel prices; and 3) a downturn in the oil & gas sector as it contributes a majority of Pantech's business earnings.

Positive on the stock. Our OUTPERFORM  call is premised on Pantech's earnings growth potential and attractive dividend yield that top most of the oil and gas stocks under our coverage. Our fair value of RM0.81, based on 9x targeted PER (based on a close approximate of the 5-year historical forward +0.5SD PER of 8.55x,) on fully-diluted EPS  implies a total 22.6% upside (17.4% capital upside from its current share price together with our forecasted dividend yield of 5.2%).

Source: Kenanga