Period  4Q14/FY14

Actual vs. Expectations Pantech Group Holdings Bhd (PANTECH)’s 4Q14 net profit of RM14.6m brought FY14 net profit to RM55.8m. This is within both our and consensus full-year estimates at 96.7% and 98.4%, respectively.

Dividends  A NDPS of 1.0 sen was declared, bringing the FY14 NDPS to 4.4 sen. This only accounted for 83.0% of our full-year NDPS expectation of 5.3 sen.

Key Results Highlights

 QoQ, 4Q14 net profit rose by 20.8% to RM14.6m, compared to RM12.1m in 3Q14 mainly due to better margins from both the trading and manufacturing divisions.

 YoY, the company registered slightly higher net profit (+7.1% from 4Q13’s RM13.7m) despite lower revenue of RM127.8m in 4Q14 (-17.5% YoY). The weaker revenue is mainly due to lower contribution from the trading division, while the marginal increase in net profit was mainly due to margins improvement in the manufacturing division due to better product mix.

Outlook  The next two quarters could be quiet for the trading division given that the fabrication and downstream oil and gas projects is likely to only pick up from 2HCY14 onwards which coincides with PANTECH’s 2Q15 earnings.

 The outcome for the US anti-dumping suit that affects PANTECH’s stainless steel division is expected by July-14. As mentioned previously, PANTECH’s alternative strategy is 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 Europe.

 Management does not rule out any further M&As as growth catalysts.

Change to Forecasts For FY15, we have fine-tuned our revenue and margins forecasts to account for lower trading division contribution but higher manufacturing division contribution. The revisions resulted in a marginal decrease of 2.6% in net profit forecasts to RM60.3m (from RM61.9m previously)

 We also introduce our FY16E net profit forecasts of RM72.7m which features a c.20% growth mainly due to the recovery in the trading division; as we believe that the company could see significant growth from oil and gas fabrication projects by 2HCY14. This coupled with the continual improvement in manufacturing margins, on account of better stainless steel plant performance and earnings growth from Nautic Steel, will spearhead growth.

Rating Maintain OUTPERFORM

Valuation  We roll-forward our fair value basis to CY15 in tandem with the rest of our oil and gas coverage.

 Based on an unchanged 12x PER on FD EPS, we increase our TP to RM1.23 (versus RM1.07 previously)

 Our current target PER is higher than the +2.0 standard deviation level of 11.7x. We valued PANTECH at such level as we believe its earnings prospects have entered a new phase after it gained access into new markets (Pertamina and UK) via Nautic Steels.

Risks to Our Call (i) Significant sluggish project execution in the oil and gas sector projects; and (ii) significant swings in raw material costs could lead to lower operating margins.

Source: Kenanga