Marred by slower global PVF demand and weaker margins, PANTECH’s 1H17 results were disappointing with CNP of RM13.2m, falling below expectations. Despite sales being anchored by orders from Pengerang development, we cut our FY17-18E earnings by 28-30%. Downgrade to UNDERPERFORM call with lower TP of RM0.50 post earnings adjustment pegged to 0.6x FY18E PBV.

Below expectations. The 1H17 results came in below expectations with core net earnings of RM13.2m, accounting for only 31% and 32% of our and market consensus’ full-year estimates, respectively. The deviation was mainly due to lower-than-expected PVF sales and weaker trading margins. A 2nd interim NDPS of 0.5 sen was declared in 1Q17 (vs. 6.0 sen in 2Q16) which was also below our expectation due to the weaker earnings.

Disappointing earnings performance. 2Q17 core net profit fell 37% QoQ to RM5.1m, no thanks to a 16% drop in revenue from both trading and manufacturing segment as well as weaker margins (7.5% in 2Q17 vs. 9.8% in 4Q16). YoY, 2Q17 core earnings plunged 51% largely attributable to lower manufacturing output as a result of weaker global demand. Overall, EBIT margin wakened to 7.5% from 13.2% in 2Q16 arising from weaker operating margins from both segments. Cumulatively, 1H17 earnings tanked 32% as a result of above-mentioned reasons.

RM100m target order from RAPID on track. Despite weaker earnings, the company is on track to meet its target of RM100m worth of orders from Pengerang site development with the YTD orders of c.RM80m. We expect the PVF demand from RAPID to anchor PANTECH’s earnings despite weakening margins amidst slower global demand. Meanwhile, its UK manufacturing division (Nautic Steels) is still staying at breakeven level this year as offshore activities remain muted.

Proposed bonus adding liquidity. Recall that PANTECH proposed: (i) bonus issue of 1 for 5 shares, (ii) bonus issue of warrants on 1 for 10 existing shares, and (iii) ESOS issuance up to 10% of share base beginning of October. We reckon the multiple proposals will improve the stock liquidity while the ESOS proposal is necessary to retain talents despite being EPS dilutive.

Lower FY17-18E earnings. We cut our FY17-18E earnings forecasts by 28-30% after adjusting for: (i) lower sales from both trading and manufacturing by 10-9% and (ii) lower EBIT margin for to 9.7-10.1% from 11.8-12.4%.

Downgrade to UNDERPERFORM. Post-earnings adjustment, we decided to switch our valuation model to PBV from PER due to the significant deterioration of near-term earnings prospect. This is also consistent with our sector valuation metric during challenging times. Our TP is now reduced to RM0.50 (ex-bonus TP: RM0.42) from RM0.54, pegged to 0.6x FY18 PBV, in line with the current average sector valuation after taking into consideration the remaining unconverted warrant and the recently proposed bonus warrant issue. Our TP has an implied CY17 PER of 11.6x, which conforms with higher PER range of 11x-13x in 2008/09 when crude oil prices recorded between USD36-80/barrel. Risks to our call include: (i) stronger-than-expected performance of the trading division, (ii) higher-than-expected selling prices of pipe fittings & valves, and (iii) pick up in Pengerang development.

Source: Kenanga Research - 19 Oct 2016