PANTECH’s overall poorer 3QFY21 earnings (-15% YoY, - 18% QoQ), deemed within expectations nevertheless, were mostly dragged by deteriorated sales demand. Nonetheless, we are anticipating some recovery in FY22 on the back of resumption of economic activities. The group is also not expected to see operational disruption under the re-imposition of MCO in CY2021, unlike CY2020; thus, leaving our FY21-22E assumptions intact. Upgrade to MARKET PERFORM, with higher TP of RM0.45, backed by dividend yields of ~4%. However, as we are in the midst reshuffling of our stock coverage universe, we are temporarily ceasing active coverage on the stock.

9MFY21 deemed within expectations. PANTECH recorded 9MFY21 net profit of RM13.9m, coming within expectations at 74% of our, and 80% of consensus, full-year earnings forecast. The group also announced an interim dividend of 0.5 sen per share, bringing FY to- date dividend to 1.3 sen, deemed broadly within expectation.

Weaker overall earnings. Sequentially, 3QFY21 saw earnings plunging 18% QoQ to RM8.7m, dragged by: (i) softer sales demand from export markets of carbon steel, resulting in poorer manufacturing revenue, and (ii) poorer trading product mix. YoY, net profit dropped by 15%, similarly due to poorer sales.

Cumulatively, net profit declined 51% YoY. On top of weaker sales, the group was also affected by operations suspension due to the implementation of the Movement Control Order (MCO) in 1QFY21.

In gradual recovery. With FY21 being a trough year, dragged by the deteriorated sales demand as a result of the Covid-19 pandemic coupled with the low oil price environment, we believe its sales demand outlook is likely to improve going into FY22 on the back of resumption of economic activities. Furthermore, we gathered that the re-imposition of MCO in 2021 should not result in operational disruption, unlike what was witnessed in 1QFY21. As such, our FY21- 22E assumptions remain largely intact.

Upgrade to MARKET PERFORM, with raised TP of RM0.45 (from RM0.31 previously). No changes to our FY21-22E numbers. Amidst the group’s recovery trajectory, we opt to raise our ascribed valuation to 10x PER on FY22E EPS (from 7x PER previously), being closer and in-line with its historical mean valuations (versus -1SD previously). Our valuation is further backed by dividend yields of ~4%.

However, as we are in the midst of reshuffling our stock coverage universe, we are temporarily ceasing active coverage on the stock for now. Nonetheless, we will still be keeping close watch on the stock, and will be releasing updates under our “On Our Radar” series of reports from time to time, should there be any significant changes in outlook.

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 - 22 Jan 2021