Following stronger 4Q17 results, we upgrade FY18E earnings by 25% in view of stronger demand in overall PVF demand and sustained manufacturing margins backed by better plant utilization. Meanwhile, we expect the new galvanizing plant to stay in the red in FY18, dragged by initial start-up cost. All in, we upgrade the stock to MARKET PERFORM call with higher TP of RM0.62 pegged to 0.8x FY18E PBV in view of improving earnings outlook.

Within expectations. The FY17 set of results came within expectations with core net earnings of RM30.9m, accounting for 102% and 106% of our and market consensus’ full-year estimates, respectively. A 4th interim NDPS of 0.5 sen was declared in 4Q17, which is similar to 4Q16, bringing the full year DPS to 1.8 sen.

Stronger earnings both QoQ and YoY. 4Q17 core net profit jumped 76% QoQ to RM11.3m, in tandem with a 54% surge in revenue, thanks to better performance in trading segments arising from higher sales demand from RAPID projects masking weaker contribution from the manufacturing division due to start-up losses from the new galvanising plant. YoY, 4Q17 core earnings also improved by 52% from RM7.4m in 4Q16, in tandem with a 40% increase in revenue, largely attributable to similar reason as mentioned above. Cumulatively, despite stronger earnings recorded in 4Q17, FY17 earnings fell 19% YoY to RM30.9m marred by lower manufacturing output as a result of weaker global demand but was cushioned by better contribution from trading segment underpinned by improved margins (EBIT margin of 10.5% in FY17 vs 9.5% in FY16).

Expecting higher jobs from RAPID. As evident from its strong improvement in 4Q17’s top-line, we expect more orders from Pengerang site development, given that the RAPID project is peaking in the next 18 months. Furthermore, we gather that there are improvements in utilisation for both its stainless steel and carbon steel plants. However, its UK manufacturing division (Nautic Steels) is likely to stay flattish at breakeven level this year as offshore activities remain muted.

Galvanising plant to remain in red. PANTECH has completed and commenced operation of its 51%-owned galvanising factory in 2H17. The company is targeting to utilise 50% of its 48,000mt capacity in FY18 but mostly likely it will remain in losses due to initial start-up cost. However, moving forward, PANTECH is confident of hitting full capacity in FY19 and this would serve an additional income stream for PANTECH whilst complementing its existing business without the need to outsource the PVF galvanising job.

Increase FY18E earnings. In view of stronger and more sustainable demand from RAPID, we increase FY18E earnings by 25% to RM41.4m on: (i) factoring higher revenue from trading segment, and (ii) improved utilisation for both carbon and stainless steel plants. FY19E earnings of RM44.3m (7% YoY growth) is introduced assuming: (i) 5% growth in trading segment, (ii) 85%/80% utilisation for stainless steel/carbon steel plants, and (iii) 90% utilisation from galvanising plant.

Upgrade to MARKET PERFORM. Following our earnings adjustment in view of improving earnings outlook, we upgrade the stock to MARKET PERFORM with higher target price of RM0.62 (from RM0.42 previously), pegged to higher PBV of 0.8x FY18 PBV (from 0.6x). Our TP has an implied FY18 PER of 12.0x, which conforms to higher PER range of 11- 13x in 2008/09 when crude oil prices traded between USD36-80/barrel. Risks to our call include: (i) weaker-than-expected performance of the trading division, and (ii) lower-than-expected selling prices of pipe fittings & valves.

Source: Kenanga Research - 26 Apr 2017