With no surprises in 9M18 results, PANTECH’s earnings outlook, in our view, remains intact backed by increasing PVF demand from RAPID and optimal plant utilizations. Its galvanising plant is also on track to break even by FY19. We keep our earnings forecasts and reiterate our OUTPERFORM call with an unchanged TP of RM0.750 pegged to its mean valuation of 1.0x FY19E PBV.

Within expectations. 9M18 results came within expectations with core net earnings of RM35.8m at 76%/78% of our/market consensus full-year estimates. A 3rd interim NDPS of 0.5 sen was declared in 3Q18 (vs 0.3 sen in 3Q17), as expected.

Down QoQ but up YoY. 3Q18 core net profit declined by 15% QoQ to RM10.1m, no thanks to weaker earnings contribution from trading (- 18%) masking improving contribution from manufacturing segment (+10%) backed by narrowing losses from the galvanising plant. Overall EBIT margin deteriorated to 9.5% in 3Q18 from 10.8% in 2Q18 as a result of poorer product mix. YoY, 3Q18 core earnings jumped by 57% from RM6.4m in 3Q17, in tandem with a 58% spike in revenue, largely attributable to stronger performance from both manufacturing (+20%) and trading (+68%) segments on the back of robust activities from RAPID. Cumulatively, 9M18 earnings also improved by 82% to RM35.8m due to the abovementioned reasons following stabilisation of oil prices. Note that manufacturing segmental margin fell to 8.6% in 9M18 from 10.2% in 9M17, dragged by operating losses in the galvanising plant despite both local plants running at near full capacity.

Galvanising plant to spur growth. Since the commercialisation of its 48,000mt capacity galvanising factory, PANTECH achieved 30-40% overall utilisation in 9M18. Although the 51%-owned plant is still lossmaking, the company is confident of achieving 50% utilisation, the breakeven level, by 4Q18. We estimate that full utilisation will contribute an additional RM8m/annum to the bottomline whilst complementing its existing operation without the need to outsource the PVF galvanising job.

Reiterate OUTPERFORM. Meanwhile, we understand that PANTECH is looking to expand its stainless steel plant potentially by another 15% to accommodate the increasing PVF demand. While this has yet to finalise, we reckon such expansion would require RM15m for capex and the additional capacity could only start generating earnings soonest by FY20. With no changes in our estimates, we maintain our OUTPERFORM call on the stock with unchanged target price of RM0.750, pegged to 1.0x FY19 PBV. Our TP has an implied FY19E PER of 13.1x, which is close to its 5-year average of 12.8x. We believe PANTECH deserves to trade at its mean valuation due to: (i) recovery in profit margins, (ii) healthy balance sheet with net gearing at 0.2x, 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 - 29 Jan 2018