Period  1Q15

Actual vs. Expectations Pantech Group (PANTECH) reported 1Q15 core net earnings of RM13.6m which was largely within expectations, having accounted for 22.5% of our full-year forecast (RM60.3m) and 21.9% of consensus estimate (RM62.0m).

 We deem the results within expectations as: (i) 1Q earnings are typically seasonally weaker and (ii) we expect the fabrication and downstream oil and gas project to pick up in 2HCY14.

Dividends  A NDPS of 1.0 sen has been declared, which comes up to 20.4% of our full-year NDPS of 4.9 sen.

Key Results Highlights QoQ, 1Q15 core net profit contracted by 7.3% despite a slight improvement in revenue (+2.3% QoQ) mainly due to the trading division recording lower revenue and weaker margin (EBIT margin 12.9% in 1Q15 vs 14.3% in 4Q14).

 YoY, despite the revenue declining by 19.5%, PANTECH registered a comparable net profit of RM13.6m in 1Q15 (vs RM13.8m in 1Q14 (-1.2% YoY)) due to better margin in the trading division because of lower operating expenses. The drop in revenue was mainly due to: (i) weaker demand in its oil and gas sector leading to lower revenue contribution from trading division and (ii) lower sales from manufacturing division on decrease in export sales demand.

Outlook  We expect the fabrication and downstream oil and gas projects to pick up in 2HCY14.

 We understand that there was adverse conclusion for the US anti-dumping suit, but management reverts that it will continue on with their strategy to: (i) shift production output to higher-end stainless steel fittings (which is not subject to such anti-dumping laws and have higher margins than stainless steel pipes); and (ii) actively explore other potential export markets such as South America and Europe.

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

Change to Forecasts As the results were within expectations, we are maintaining our FY15-16 net profit forecasts.

Rating Maintain OUTPERFORM

Valuation  Our target price is maintained at RM1.23, based on unchanged 12x PER on FD EPS.

 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