PANTECH recorded a net profit of RM10.7m for 2QFY21 (deemed broadly within expectations), bouncing back from losses in the previous quarter, due to the resumption of operations post-MCO. Moving forward, we believe the losses faced in 1Q should be a non-recurring event (barring any further suspension in operations), and that the group is in a trajectory for gradual recovery. Nonetheless, we feel its current premium valuation is unjustified (at 17x forward PER) with the sector still in the midst of a down-cycle. Maintain UP with TP of RM0.31.

1HFY21 deemed broadly within expectations. PANTECH recorded 1HFY21 net profit of RM5.2m, coming in at 28% and 33% of our and consensus full-year earnings forecasts, respectively. Nonetheless, this is deemed to be broadly within expectations, in anticipation of a stronger 2HFY21, as some operations were suspended in 1QFY21 due to the movement control order (MCO), resulting in a quarterly loss. The group also announced an interim dividend of 0.5 sen per share, bringing YTD dividends to 0.8 sen (versus 1HFY20 of 1.0 sen) – also within expectations.

Resumption of operations. 2QFY21 recorded a net profit of RM10.7m, bouncing back from a net loss of RM5.6m recorded last quarter in 1QFY21. This was mainly due to the resumption of normal business activities after operations were temporarily suspended in 1Q to comply with the MCO. YoY, net profit was also up by 49% due to more favourable product mix. We believe the quarter also benefitted from a surge in sales demand following the uplift of the MCO as orders piled up from when operations were suspended.

Cumulatively, 1HFY21 net profit plunged 72% YoY. As aforementioned, this was due to the suspension of operations in the 1Q in compliance with the MCO.

In gradual recovery mode. Barring another suspension of operations, we believe the losses suffered in 1QFY21 should be a non-recurring event. That being said, we suspect that the upcoming quarter may see a slight dip as sales demand normalises but nonetheless, the worst should be over. However, on the bigger picture, PANTECH is seen to be adversely affected by the global trend of capex cuts by major oil producers. PANTECH’s business partially relies on green-field investments to drive sales, and hence, lowered capex spending by the oil majors would generally weaken its sales prospect moving forward.

Maintain UNDERPERFORM and TP of RM0.31, pegged to 7x PER on FY22E EPS – in line with -1SD from mean valuations. No change to our FY21-22E earnings post-results.

The stock is currently trading at a premium of 17x forward PER – close to +1SD above its mean valuations. We believe this premium is somewhat unjustified, given that the oil and gas sector is still in the midst of a down-cycle.

Risks to our call include: (i) stronger-than-anticipated sales, (ii) higher demand for manufactured products, (iii) stronger-than-expected product margin mix, and (iv) any potential M&A activities.

Source: Kenanga Research - 21 Oct 2020