Dragged by weaker-than-expected manufacturing division margin, PANTECH is off to a weak start in 1Q17 with CNP of RM8.1m falling below our expectations. Despite sales being anchored by orders from Pengerang development, we trimmed our FY17-18E earnings by 5.8-2.6% in view of lower ASP for pipes, valves and fittings (PVF) amidst challenging environment. Retain MARKET PERFORM call with lower TP of RM0.54 post earnings adjustment pegged to 8x CY17 PER.

Below expectations. The 1Q17 results came in below expectations with core net earnings of RM8.1m, accounting for only 18.0% and 18.5% of our and market consensus’ full-year estimates, respectively. The deviation was mainly due to lower-than-expected manufacturing division margin. A 1st interim NDPS of 0.5 sen was declared in 1Q17, which is similar to 1Q16, but is below our expectation due to weaker earnings.

Stronger QoQ but weaker YoY performance. 1Q17 core net profit improved by 9% QoQ to RM8.1m, thanks to a 23.2% increase in revenue from trading segment as well as better margins (10.0% in 1Q17 vs. 2.5% in 4Q16) driven by better product mix. However, it was partially dragged by poorer contribution from manufacturing division as a result of margin erosion (8.9% in 1Q17 vs. 15.0% in 3Q16) amidst flattish revenue. YoY, 1Q17 core earnings slid 11.3% largely attributable to lower manufacturing output as a result of weaker global demand. Overall, EBIT margin wakened to 9.8% from 11.3% in 1Q16 arising from weakening operating margins from both segments.

Targeting RM100m order from RAPID in FY17. Recall that PANTECH secured approximately RM60m order from RAPID project in FY16. With the YTD orders of c.RM44m, the company is on track to meet its target of RM100m worth of orders from Pengerang site development. We expect the PVF demand from RAPID to pick up with the anticipation of more job awards in second half of CY16. Meanwhile, its UK manufacturing division (Nautic Steels) is likely to stay flattish at breakeven level this year as offshore activities remain muted.

Galvanising plant slated to commence in FY18. The 51% owned galvanising factory is on track to be completed by end of 4Q17. PANTECH is targeting to utilise 50% of its 48,000mt capacity in FY18 but profitability of the business could be lower due to initial start-up cost. This would serve an additional income stream for PANTECH whilst complementing its existing business without the need to outsource the PVF galvanising job. We estimated c.RM29m revenue contribution (5% of our FY18 top line forecast) at 50% utilisation.

Lower FY17-18E earnings. We cut our FY17E earnings forecasts by 5.9% after adjusting for: (i) lower products ASP for manufacturing division by 5%, and (ii) lower EBIT margin for manufacturing segment to 12% from 14%. FY18E earnings is also trimmed down by 2.6% consequently.

Maintain MARKET PERFORM. Post earnings adjustment, our TP is lowered to RM0.54 from RM0.55, pegged to an unchanged CY17 PER of 8x, which is also in line with small caps O&G’s down-cycle valuation.

Risks to our call include: (i) Weaker-than-expected performance of the trading division, (ii) Lower-than-expected selling prices of pipe fittings & valves, and (iii) slowdown in Pengerang development.

Source: Kenanga Research - 22 Jul 2016