Period     1QFY14

Actual vs. Expectations   1QFY14 core net profit of RM13.8m was largely within our and the consensus’ expectations at 20.9% and 21.1%  of full-year net profit forecasts (RM66.1m and RM65.3m respectively). 

We believe the results are within expectations as:  (i) 1Q earnings are typically seasonally weaker and (ii) we suspect there will be an earnings acceleration in 2HFY14 on the back of continued improvement in the stainless steel division (which started to break-even in 1QFY14).

Dividends    A NDPS of 1.2 sen has been declared, which comes up to 22.6% of our full-year NDPS of 5.3sen. 

Key Results Highlights   QoQ, despite the lower trading division margin caused by weaker project execution nearing the General Elections; the 1QFY14 net profit was up (+3.8%) due to: (i) the low base effect of 4QFY13 as it was a shorter operational quarter, given the earlier Chinese New Year celebration in 2013; and (ii) better margin from the manufacturing division due to the general improvement in the stainless steel division.

YoY, the results were higher (+11.7%) mainly due to: (i) better stainless steel division performance and (ii) continued growth of the Nautic Steels, acquired last year.

Outlook    The 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 acquisition of Nautic Steels in the UK. 

Management guides that it will contest the US anti-dumping suit on the stainless steel division, and hopes to  get a resolution by 1QCY14. As an alternative strategy, Pantech is actively looking to shift production to higher-end  stainless steel fittings production (which is not subjected to such antidumping laws and have higher margins than stainless steel pipes); and is actively exploring other potential export markets such as South America and European countries.    Management does not rule out any further M&As as a growth strategy.

Change to Forecasts    Whilst the 1QFY14 DPS is below our estimates, we are maintaining our forecasts as there could be higher dividend payout in later months.

As the results were within expectations, we are maintaining our FY14-15 net profit projections.

Rating   Maintain OUTPERFORM

Valuation     We maintain our target price of RM1.28 based on unchanged CY14 target PER of 12x.

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

Risks    i) Sudden downturn in the oil and gas sector could impact the company's prospects; and ii) Significant swings in raw material costs could lead to lower operating margins.

Source: Kenanga