We  came  away  from  Pantech's analysts  briefing  last  week  feeling  upbeat  on  the group's future outlook, buoyed by: i) its RM298m order book, which will keep it busy until  July  2013,  ii)  its  stainless  steel  division  has  reached  breakeven,  iii)  Nautic Steel's  expansion  will  boost  earnings  significantly,  and  iv)  the  O&G  sector's operating  environment  is  favourable  for  the  group  as  a  whole.  Maintain  BUY,  with our RM1.00 FV based on 9x its FY14F PE.  

9MFY13  results  meet  our forecast.  Pantech reported another round of healthy earnings growth for 9MFY13, chalking up a higher revenue of RM480.9m as well as better net profit of  RM42.4m,  in  line  with  our  forecast.  The  promising  performance  was  mainly  due  to improved  demand  in  the  O&G  sector  and  export  market,  including  positive  contribution from Nautic Steel. Going forward, we are confident that Pantech would be able to meet our full-year  FY13  earnings  forecast,  and  do  not  discount  the  possibility  of  those  numbers beating our expectations.

O&G  focus  the  right  strategy.  Pantech  supplies  its  products  to  a  wide  range  of  users, including  palm  oil  mills,  power  plants,  chemical  plants  and  other  industries  whose production processes involve the transmission of fluids and gases. Currently, however, the group has set its sights mainly on the O&G sector, which we believe is the right strategy as the sector is booming and job opportunities abound.

Outlook  for  all  divisions  bright.  The  outlook  for  Pantech's trading and manufacturing divisions  continue  to  look  promising,  with  the  former  continuing  to  be  a  major  earnings contributor due to escalating demand while the latter is picking up. The group is targeting to transform into a manufacturing company through organic growth and M&As.

Maintain  BUY,  FV  unchanged.  We  continue  to  like  Pantech  and  are  keeping  our  BUY recommendation, with our RM1.00 FV unchanged.

May exceed expectations. With its 9MFY13 cumulative net profit at RM42.4m, our bullish view  is  that  the  company  may  continue  to  deliver  good  results.  We  are  confident  that Pantech  would  be  able  to  meet  our  full-year  FY13  earnings  forecast  of  RM53.7m  and  do not  discount  the  possibility  that  FY13  earnings  may  exceed  both  our  and  consensus expectations (consensus forecast: RM54.5m).

Expanding on the right track. Domestically, Pantech is expected to benefit from Petronas' RM300bn  investment  plans  given  that  the latter's new  offshore  platform  and  downstream projects  require  the  usage  of  its  range  of  products.  Besides,  the  recent  O&G  discoveries offshore  Malaysia  and  the  ongoing  O&G  investment  under  the government's Economic Transformation  Programme  (ETP)  are  expected  to  intensify  capital  investment  in  this sector.  Globally,  as  we  have  highlighted,  Pantech  is  able  to  leverage  on  Nautic  Steel's brand to supply its products to the international oil majors and that may further improve its earnings  power.  Management  also  highlighted  that  it  is  focusing  in  Brazil  and  that  Nautic Steel has secured jobs from Petrobras.  We believe our bullish view on Pantech is justified given  that  the  company  has  brilliantly  positioned  itself  in  the  O&G  sector  to  ride  on  the booming  wave.  (Please  see  our  previous  report  "A  View  From  The O&G Perspective" highlighting the investment of Petrobras in the O&G sector).
   
Manufacturing  company  in  the  making.  Currently, Pantech's trading and manufacturing divisions  contribute  61%  and  39%  respectively  to  group  revenue,  after  intersegment elimination.  The  group  is  aiming  to  achieve  the  ratio  of  50:50  by  2015  through  organic growth  as  well  as  M&A  focused mainly  in  the  O&G sector. The  transformation of  Pantech from  a  trading  company  into  a  manufacturing  company  could  be  a  positive  rerating  factor for the company in future.

Stainless  steel  finally  ready  to  shine.  During the analysts' briefing, management guided that  the company's  stainless  steel  division  has  finally  broken  even  in  Dec  2012,  after overcoming  the  steep  learning  curves  and  that  was  within  our  expectations.  We  expect positive  contribution  from  this  division  moving  forward,  further  strengthening  Pantech's earnings power.

Nautic  Steel's  expansion  intact.  The  expansion  of  Nautic  Steel  has  become  more concrete  following  the group's  acquisition  of  a  new  building  in  UK  that  could  increase  its capacity  as  well  as  improve  its  product  mix.  Moreover,  with  the  introduction  of  new machineries and increased focus on automation, we expect better production efficiency and greater margin from Nautic Steel in the future.

FY14   to  be  a  promising  year. We  remained  bullish  on  Pantech  given  that  i)  its  current total  order book of  RM298m will  keep it busy  until  July  2013,  ii)  its  stainless  steel  division could  start  contributing  positively  to  the  group,  or  at  least  stop  incurring  losses,  iii)  Nautic Steel's  expansion  will  contribute  more  significant  earnings  to  the  group,  and  iv)  the  O&G sector's operating environment is favourable to the group as a whole.  

Maintain  BUY with  FV  at  RM1.00. We have earlier taken into account the dilution impact of  its  EPS  arising  from  the  conversion  of  its  Irredeemable  Convertible  Unsecured  Loan Stocks  (ICLUS)  with  the  assumption  that  all  its directors  have  converted  their  outstanding ICULS.  Other  than  that,  we  have  also  revalued  Pantech,  pegging  it  at  9x  forward  PE instead of 6x as we note that other domestic O&G related companies have been trading at 10x-12x  PE.  As  we  continue  to  remain  bullish  on  the  company's  outlook,  we  are maintaining our BUY recommendation, with our FV unchanged at RM1.00

Source: OSK