News    Yesterday, Pantech Group Holdings (PANTECH) announced that its wholly-owned subsidiary has secured a contract valued at USD1.5m (RM4.8m) to supply induction long bends to Pertamina, the Indonesian stateowned oil and natural gas corporation. 

The shipment of the induction long bends to Indonesia is scheduled for 2QFY2014. 

Comments    We are positive on the as we believe this is just a starting point for further jobs from Pertamina, despite the low contract sum.

Given that the induction long bends are expected to be delivered in 2QFY14, revenue recognition would be within FY14. 

We estimate FY14 revenue and net profit to increase by a marginal 0.7%. 

Outlook   The company’s trading and manufacturing divisions will continue to be buoyed by: (i) rising project flows from the regional oil and gas sector; and (ii) contributions from new markets with its purchase of Nautic Steels in the UK.

Forecast   We are maintaining our earnings estimates given that the impact to current earnings will be marginal.

Rating   Maintain OUTPERFORM

Valuation    Whilst the near-term earnings impact could be minimal, we believe the new development could be an indication of Pantech’s upward earnings trajectory. As such, we raise our PER valuation to 12x (from 11x previously). 

Our current target PER is close to the +2.0 std. deviation level of 11.7x as we firmly believe PANTECH is on-track for more upsides buoyed by (i) its entry into new markets (Pertamina and UK); and (ii) the current oil and gas sector boom which is similar to the 2007-2008 boom, evidenced by the significant amount of contract flows this year.

With the revised PER we raise our target price to RM1.28 (from RM1.18).

Risks   A sudden downturn in the oil and gas sector could impact the company’s prospects while significant  swings in raw material costs could cut into  margins.

Source: Kenanga