With no surprises in FY18 results, PANTECH’s earnings outlook, in our view, remains intact backed by (i) recovering PVF demand from O&G projects globally as well as (ii) optimal plants utilization. Its galvanising plant is likely to contribute positively starting from FY19. All in, we keep our earnings forecast and reiterate our OUTPERFORM call with unchanged TP of RM0.750 pegged to its mean valuation of 1.0x FY19E PBV underpinned by 4% dividend yield.

Within expectations. FY18 results came within expectations with core net earnings of RM47.0m at 100%/98% of our/consensus’ full-year estimates. A 4th interim NDPS of 0.5 sen was declared in 4Q18 (vs. 0.5 sen in 4Q17), bringing its full-year DPS to 2.5 sen (vs. FY17: 1.8 sen), as expected.

FY18 core earnings up 52% YoY. 4Q18 core net profit increased by 11% QoQ to RM11.2m thanks to stronger earnings contribution from both trading (+6%) and manufacturing segment (+13%) backed by turnaround of the galvanising plant. Besides this, the overall EBIT margin improved to 11.0% in 4Q18 from 9.5% in 3Q18 as a result of better product mix. YoY, 4Q18 core earnings dropped marginally by 1% from RM11.3m in 4Q17, in tandem with slight drop of 2% in revenue, largely attributable to weaker trading (-33%; lower volume and poorer product mix) masking improving manufacturing segment (+56%; led by higher plant utilisation). Cumulatively, FY18 earnings improved by 52% to RM47.0m due to better performance in both segments on the back of robust activities from RAPID and recovering PVF demand from overseas markets.

Galvanising plant to spur growth. Since the commercialisation of its 48,000mt capacity galvanising factory in 4Q17, PANTECH had achieved 55% utilisation and managed to record small profit in 4Q18. We estimate the full utilisation will contribute an additional RM8m/annum to the bottom-line whilst complementing its existing business without the need to outsource the PVF galvanising job to third parties.

Maintain FY19E earnings. We make no changes to our FY19E earnings while FY20E earnings of RM52.2m (+4% YoY growth) is introduced assuming; (i) 5% growth in trading segment, and (ii) 90% utilisation for stainless steel, carbon steel and galvanising plants.

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 be finalised, we reckon such expansion would require RM15m capex and the additional capacity could only start generating earnings soonest by mid-FY20. All in, we maintain our OUTPERFORM call on the stock with unchanged target price of RM0.750, pegged to 1.0x FY19E PBV. Our TP has an implied FY19E PER of 12.7x, which is close to its 5-year average of 12.8x. We believe PANTECH deserves to trade at its mean valuation given its: (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 - 30 Apr 2018