Period   3Q15/9M15

Actual vs. Expectations   Pantech Group (PANTECH) reported 3Q15 core net earnings of RM9.1m which brought 9M15 net profit to RM36.1m. This was below our (RM60.3m), and consensus’ (RM56.6m), fullyear expectations, at 59.9% and 63.8%, respectively. The major deviation of earnings resulted from lower-than-expected manufacturing revenue and lower-than-expected overall group EBIT margin achieved in 3Q15.

Dividends   A 3rd interim NDPS of 0.6 sen was declared in 3Q15, bringing 9M15 NDPS to 2.6 sen. This is below our expectations at 65.0% of our full-year NDPS estimate of 4.0 sen.

Key Results Highlights   In 3Q15, PANTECH’s core net profit declined 32.2% QoQ largely due to a 23.3% drop in trading revenue, which stemmed from slower demand from the oil and gas sector and competitive pricing environment in the industry. EBIT margin from the trading division, as a result, shed 670 basis points from 14.2% to 7.5%.

  On a YoY basis, core net profit plunged by 24.9% also due to weaker trading revenue (-12.4%) albeit being slightly offset by a 4.1% YoY gain in manufacturing revenue, driven by stronger performance in stainless steel fitting manufacturing division.   In 9M15, net profit fell by 12.4% YoY largely due to weakness in the manufacturing division caused by lower export sales of stainless steel pipes to the Middle East, Europe and US. Revenue fell by 21.3% whilst EBIT fell by 14.6%.

Outlook   While the RAPID project is expected to contribute positively to the group in the coming years, we believe the near-term outlook could be sluggish due to the challenging oil and gas industry amid uncertainty in crude oil prices.   Meanwhile, the export market for the manufacturing division is expected to be challenging in the near-term as Europe struggles with tepid GDP coupled with the loss of some USexport sales due to anti-dumping policies previously.

Change to Forecasts   Due to the bleaker oil and gas industry outlook, we cut our FY15 and FY16 core earnings forecasts by 23.4% and 23.2%, respectively. This is after we have reduced our FY15/16 revenue growth forecast for trading to 0.0%/5.0% (from 10% previously). We have also reduced our FY15/16 carbon steel capacity utilisation assumption to 75.0%/85.0%, respectively (from 100.0% previously). We have also reduced our DPS forecast to 3.3 sen/3. 9sen for FY15/16E in view of weaker near-term earnings outlook.

Rating Downgraded to UNDERPERFORM from OUTPERFORM

Valuation   Post our earnings cuts, we reduced our TP to RM0.72 (from RM0.86 previously) based on an unchanged 9.0x CY15 PER on fully diluted basis.

Risks to Our Call   (i) Faster than expected recovery in the trading division.

  (ii) Stronger than expected growth in manufacturing exports.  

Source: Kenanga