News

Yesterday, PANTECH entered into a Joint Venture agreement with Euromech Machinery Sdn Bhd (EMSB) to establish a new joint-venture (JV) company named Pantech Galvanising Sdn Bhd (PGSB).

The JV aims to provide hot-dip galvanizing services and PANTECH will hold 51% stake in PGSB with the remaining stake to be owned by EMSB.

Comments

EMSB is a local incorporated company which is involved in the manufacturing and fabrication of conveyor system.

We are positive on the JV as it will enable PANTECH to expand its business into galvanisation which is utilised in both upstream and downstream activities of oil and gas sector by leveraging on EMSB’s expertise from Taiwan.

PGSB will then set up a galvanising factory in Johor, which is targeted to be completed within one year.

The CAPEX is estimated to be RM25.0m spanning FY16 and FY17. Its impact to gearing will be minimal even with full debt financing.

Earnings are expected to kick in at earliest by 3Q17 upon completion of the plant but the contribution quantum is uncertain pending more information from the management. Hence, it has yet to be factored in our forecast.

Outlook

Near-term outlook remains sluggish due to the challenging oil and gas industry amid uncertainties in crude oil prices. In view of maintaining plants’ utilisation rates, we opine the company will take on more orders to manufacture lowermargin products. Hence, we expect margin to remain weak in the coming quarters.

Meanwhile, we expect the UK manufacturing division (Nautic Steels) to stay weak in the coming quarters since it mainly supplies to deepwater offshore players operating at the North Sea Region, which is experiencing a massive slowdown.

On a positive note, we expect the trading segment’s prospects to be better in 2H16 and FY17, underpinned by increasing PVF demand from RAPID project as the bulk of earlier works, which were mainly earthworks, have been completed.

At the same time, we are guided that PANTECH is likely to deliver its first RAPID-related orders worth USD12m in the 2H16 and the company is looking to secure more orders from RAPID project despite a slight delay in the progress.

Forecast

No changes to our FY16E-FY17E numbers.

Rating

Upgrade to MARKET PERFORM from UNDERPERFORM on recent share price weakness

Valuation

TP is revised downwards to RM0.60 from RM0.67 previously, as we downgrade our target PER to 8x from 9x previously in view of weaker oil price outlook for the next two years. This is consistent with the 8x PER multiple that we have applied for small cap players.

Risks to Our Call

(i) Slower-than-expected recovery in the trading division.

(ii) Weaker-than-expected growth in manufacturing exports.

Source: Kenanga Research - 30 Sep 2015