Period

3Q16/9M16

Actual vs. Expectations

The 9M16 results came in below expectations with core net earnings of RM30.6m accounting for only 69% and 64% of our and market consensus’ full-year estimates, respectively. The deviation was mainly due to lower-than-expected manufacturing division margin as a result of intense price competition.

Dividends

A 3rd interim NDPS of 0.5 sen was declared in 3Q16 which is slightly lower than the 0.6 sen paid in 3Q15. This brought 9M16 dividend to 1.6 sen, which only accounted for 52% of our estimate.

Key Results Highlights

3Q16 core net profit rose 6.4% QoQ to RM11.7m boosted by 26.3% higher revenue from trading segment as well as better margin of 11.6% in 3Q16 vs. 10.3% in 2Q16 but partially offset by weaker contribution from manufacturing segment.

3Q16 core earnings also registered 22.2% YoY growth largely attributable to the above-mentioned reasons and underpinned by 16.1% increase in overall topline. Trading EBIT margin strengthened to 11.6% from 7.5% in 3Q15 while manufacturing margin fell to 13.0% from 17.7% in 3Q15.

9M16 cumulative core net profit dropped 15.0% YoY from RM36.1m in 9M15 mainly caused by margin compression arising from intense price competition (12.0% in 9M16 compared to 14.0% previously) despite a flattish 2% growth in revenue.

Outlook

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

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

On a positive note, we expect its trading segment to see a better prospect in FY17, underpinned by increasing PVF demand from RAPID project as the bulk of earlier works, which were mainly earthworks have been completed.

The recent JV into the galvanising business will be a mediumlong- term catalyst to PANTECH, but the potential revenue contribution will only kick in earliest FY18.

Change to Forecasts

We cut our FY16E and FY17E core earnings forecasts by 2.7% and 8.9%, respectively, after (i) adjusting our manufacturing EBIT margin assumption downwards to 12% from 13% for carbon steel manufacturing plants and (ii) lowering carbon steel plant utilisation to 75% from 80%.

In addition, our NDPS forecasts are also reduced to 2.1/2.3 sen for FY16/17E assuming lower dividend payout ratio of 25% from 35% as we believe PANTECH will conserve more cash amid the challenging environment.

Rating

Maintain MARKET PERFORM

Valuation

Post our earnings cut, we reduced our TP to RM0.53, from RM0.58 previously, based on an unchanged 8.0x CY16 PER.

Risks

(i) Weaker than expected performance of the trading division.

(ii) Lower than expected selling prices of pipe fittings & valves.

Source: Kenanga Research - 21 Jan 2016