With no surprises in 1H18 results, PANTECH’s earnings outlook, in our view, remains intact backed by increasing PVF demand from RAPID as well as consistent optimal plant utilizations. All in, we keep our earnings forecast and reiterate our OUTPERFORM call with an unchanged TP of RM0.75 pegged to its mean average valuation of 1.0x FY19E PBV.

Within expectations. PANTECH’s 1H18 results came within expectations with core net earnings of RM25.7m at 54%/56% of our and market consensus’ full-year estimates. A 2nd interim NDPS of 0.5 sen was declared in 2Q18 (vs. 0.5 sen in 2Q17), as expected.

Down QoQ but up YoY. Despite revenue growing marginally by 4%, 2Q18 core net profit declined by 16% QoQ to RM11.8m no thanks to weaker earnings contribution from both manufacturing (-11%) and trading (-16%) segments. Besides this, the overall EBIT margin deteriorated to 17.0% in 2Q18 from 19.4% in 1Q18 as a result of poorer product mix. YoY-wise, 2Q18 core earnings jumped 1.3x from RM5.1m in 2Q17, in tandem with a 51% spike in revenue, largely attributable to stronger performance from both manufacturing (+44%) and trading (+1.8x) segments on the back of robust activities from RAPID. Cumulatively, 1H18 earnings also improved by 94% to RM25.7m due to the abovementioned reasons following stabilisation of oil prices. Note that manufacturing segmental margin fell to 8.8% in 1H18 from 9.2% in 1H17 dragged by operating losses in the galvanising plant despite both the local plants were still operated at close to full capacity.

Galvanising plant to spur growth. Since the commercialisation of its 48,000mt capacity galvanising factory last December, PANTECH had achieved 30-40% utilisation in 1H18. Although the 51%-owned plant is still loss-making, the company is confident of achieving 50% utilisation which is the breakeven level by 4Q18. We estimate the full utilisation will contribute additional RM8m/annum to the bottom-line whilst complementing its existing business without the need to outsource the PVF galvanising job to third parties.

Reiterate OUTPERFORM. Although PANTECH has no aggressive expansion plan in the near term, the company is looking to replace and upgrade part of its machinery and this would probably enhance its production capacity. With no changes in our estimates, we maintain our OUTPERFORM call on the stock with an unchanged target price of RM0.75, pegged to higher PBV of 1.0x FY19 PBV. Our TP has an implied FY19E PER of 13.1x, which is close to its 5-year average mean of 12.8x. We believe PANTECH deserves to trade at its average mean valuation given: (i) recovery in profit margins, (ii) healthy balance sheet with net gearing at 0.4x, and (iii) higher order-book visibility of 5 months from 3 months previously. 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 - 25 Oct 2017