Valuation / Recommendation

Results were above expectations, achieving 35.3% and 34.6% of our full year revenue and profit forecasts for FY23 respectively due to higher local oil and gas demand and robust export demand for stainless steels. 1Q23 represents the best quarter for Pantech since inception.

We maintain a BUY recommendation on Pantech with a revised TP of RM0.900 based on FY23F EPS 9.3 sen and PE of 9.7x in line with the 5-years average. We like the stock due to its attractive dividend yield, and cheap valuations. The target price represents a potential return of 47.5% over the current price.

Investment Highlights

Key catalyst was from the manufacturing and trading division, contributing 45% and 55% to total revenue for the current quarter. Deliveries to local oil and gas sector were higher.

Results were stronger due to better product mix, and increased export demand supported by the reopening of the economy and waning impact from the Covid-19 pandemic. We noticed that nickel, which is a major raw material utilised by Pantech had decreased in price resulting in lower ASP for their products.

Oil & Gas (O&G) sector a growth driver. Petronas had allocated 20% of planned capex over the next 5 years from FY22. This suggests a positive industry outlook, potentially adding tally to the Group’s current order book of RM500m as of 30th June 2022, expected to be fully recognised within 9 months to 1.5 years. With more than 70% of the Group’s earnings derived from this sector, Pantech is in the right position to benefit from the capex cycle. Approximately 40% of the revenue from this sector comes from the maintenance of pipes, valves, and fittings (PVF), suggesting a strong recurring income.

Expect higher contributions from the palm oil industry. Pantech supply PVFs to the palm oil industry. We think that more contracts could be secured from the palm oil industry on the back of strong palm oil prices. We expect contributions from this segment to the company’s revenue to increase to 20% for FY23, up 4% from FY21. With more than 30,000 stock keeping units (SKUs), the company is better positioned to meet rising customer demands.

Dividend. Dividend of 1.5 sen per share was declared on 4Q22, ex on 29th Aug 2022. (FY22 – 4.0 sen, 4Q21 – 0.5 sen, FY21 – 1.8 sen)

Risk factor. Key risks include fluctuation of steel and nickel prices, labour shortage, and slower-than-expected contract flow.

Source: Mercury Securities Research - 29 Jul 2022