Period  2Q15/1H15

Actual vs. Expectations Pantech Group (PANTECH) reported 2Q15 core net earnings of RM13.4m; bringing 1H15 net profit to RM27m. This is largely within expectations, having accounted for 45% of both our and consensus’ full-year forecasts (RM60.3m and RM59.8m).

Dividends  A 2nd interim NDPS of 1.0 sen was declared in 2Q15, bringing 1H15 DPS to 2.0 sen. This is about 42% of our full-year NDPS estimate of 4.8 sen.

Key Results Highlights QoQ, 2Q15 core net profit contracted by 1.4% despite an improvement in revenue (+8.2% QoQ) mainly due to lower margins from the manufacturing division on lower global export sales (EBIT margin 15.4% in 2Q15 vs 19.9% in 1Q15).

 YoY, PANTECH registered a decline of 12.5% in net profit mainly due to lower earnings from manufacturing division (-16.4% in EBIT) caused by the loss of American business after the anti-dumping suit and the quarterly sluggish global sales. However, the impact was mitigated by lower taxation expenses.

Outlook  We expect the fabrication and downstream oil and gas projects to pick up in 2HCY14. We understand that PANTECH has secured its first order from the RAPID project in Oct-14, which will contribute to 4Q15 earnings.

 Management reveals that it will continue with their strategy to: (i) shift production output to higher-end stainless steel fittings (which are not subject to 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 to counter the earnings loss from the American antidumping suit.

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

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

 However, we understand that the 1.0sen DPS will continue in the coming quarters; as such we have cut our FY15-16 DPS expectations to a 4.0sen and 4.8sen respectively (from 4.8sen and 5.7sen respectively).

Rating Maintain OUTPERFORM

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

 We understand that the sector has undergone some de-rating given the lower crude oil prices and sluggishness in the global economy.

 However, we believe PANTECH is well positioned in the downstream segment which will continue to shine in the medium-term as Petronas goes all out to ensure the success of the RAPID project. It is such underlying factors coupled with

PANTECH’s access to new markets (via Nautic Steels) that we continue to value it at PER above the +2.0 standard deviation level of 11.7x.

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

Source: Kenanga