Period  2Q14/1H14

Actual vs. Expectations  Pantech Group Holdings Bhd (PANTECH)’s 2Q14 net profit of RM15.3m brought its 1H14 net profit to RM29.1m which is largely within expectations, accounting for 44.0% and 44.5% of our (RM66.1m) and the consensus (RM65.3m) full year estimates, respectively.

 We believe PANTECH is still on-track to meet our full-year forecast on earnings acceleration in the 2H14 on the back of continued improvement in its stainless steel division.

Dividends  A NDPS of 1.2 sen was declared, bringing the 1H14 NDPS to 2.4 sen and accounted for 45.3% of our full-year NDPS expectation of 5.3 sen.

Key Results Highlights  QoQ, 2Q14 revenue was lower at RM153.8m compared to RM162.3m in 1Q14 mainly due to weaker products demand from the trading division. However, net profit in 2Q14 increased by 11.0% due to: (i) increase in manufacturing output to satisfy the increase in the local and export sales demand, and (ii) better margin from the manufacturing division due to increase in niche products sales.

 YoY, despite a 6.3% decrease in revenue, net profit was up by 7.0% mainly due to better margin from the stainless steel division which offset the weaker trading division’s performance.

 YTD, PANTECH registered a higher revenue of RM316.1m (+2.2%) and net profit of RM29.1m (+8.6%) mainly due to better contribution from manufacturing division as mentioned above.

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 recent acquisition of Nautic Steels in the UK.

 Management guides that it will contest the US anti-dumping suit on its 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 subject to such anti-dumping 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 growth catalysts.

Change to Forecasts  Although the 1H14 NDPS is lower than envisaged, we are maintaining our forecasts on an expectation of higher payout in subsequent quarters.

 As the results were within expectations, we are maintaining our FY14 and FY15 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 still has more upside potential buoyed by (i) its entry into new markets (Pertamina and UK), and (ii) further contract flows given the current boom in the oil and gas sector, which is similar to the 2007-2008 boom.

Risks to Our Call  i) Sudden downturn in the oil and gas sector and (ii) significant swings in raw material costs could lead to lower operating margins.