Following stronger 1Q18 results, we upgrade FY18-19E earnings by 14% in view of stronger overall demand for PVF and sustained manufacturing margins backed by better plant utilization. The special dividend of 0.5 sen/share was a positive surprise. All in, we upgrade the stock to OUTPERFORM with higher TP of RM0.75 pegged to 0.9x FY19E PBV in view of improving earnings outlook.

Above expectations. PANTECH’s 1Q18 results came above expectations with core net earnings of RM14.0m at 34% of our and market consensus’ full-year estimates. The positive deviation is helped by better-than-expected contributions from both manufacturing and trading businesses. A 1st interim NDPS of 0.5 sen was declared in 1Q18, as expected. However, the declaration of additional special dividend of 0.5 sen was a positive surprise.

Strong start. 1Q18 core net profit increased by 24% QoQ to RM14.0m, despite a marginal drop in revenue by 0.7%, thanks to stronger performance from manufacturing segment and lower taxation expense, offsetting weaker contribution from trading division. Note that manufacturing arm recorded a 27% increase in revenue, underpinned by stronger local and overseas demand while the segmental EBIT margins also improved to 10.5% in 1Q18 from 0.4% in the preceding quarter due to better operating efficiency masking operating losses from its new galvanising plant. YoY wise, 1Q18 core earnings jumped by 73% from RM8.1m in 1Q17, in tandem with a 22% increase in revenue, largely attributable to stronger performance from both manufacturing and trading segments. On a closer look, trading division’s earnings strengthened by 70% on the back of robust activities from RAPID and improving margins as a result of better product mix following stabilisation of oil prices.

Expecting better plant utilisation. We gather that both its stainless steel and carbon steel plants are currently operating at 90% utilisation (vs 90%/70% in FY17). Meanwhile, slight improvement is also seen in its UK manufacturing division (Nautic Steels) at 65% utilisation, improving from 60% in FY17 although offshore activities remain muted. On the other hand, the company is on track of the 50% target utilisation of its 48,000mt capacity galvanising factory in FY18. Subsequently, PANTECH is aiming to achieve 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 FY18-19E earnings by 14%. In view of stronger and more sustainable demand from local and overseas markets, we increase both FY18-19E earnings by 14% to RM47.2m and RM50.4m, respectively, on: (i) stronger margins for trading segment, and (ii) improved utilisation for both carbon and stainless steel plants.

Upgrade to OUTPERFORM. Following our earnings adjustment in view of improving earnings outlook, we upgrade the stock to OUTPERFORM with a higher target price of RM0.75 (from RM0.62 previously), pegged to higher PBV of 0.9x FY19 PBV (from 0.8x). Our TP has an implied FY19E PER of 12.1x, which is close to its 5-year average mean of 12.8x and FBMSC CY18 PER of 11.5x. 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 - 27 Jul 2017