We maintain our BUY recommendation on Pantech Group Holdings Berhad (Pantech) with a higher target price, from RM0.88 to RM1.10 as we rolled over our valuations to FY2/24 while introducing FY2/24 net earnings at RM134.9m Based on our earnings estimates, Pantech’s dividend payout should improve, pushing its prospective yield to more than 7% for FY2/23 and beyond. BUY with a target price of RM1.10 based on a PER of 10x (3 years historical average).

During a recent engagement with the company, management updated us on its latest development. In the most recent quarterly reporting, Pantech 2QF2/Y23 surged 102.5% YoY to RM31m, contributed by better performance in the trading and manufacturing division.

Management noted that robust oil prices are likely to positively impact its related capital activities, such as increased spending in facilities maintenance and upgrading activities in the oil and gas industry. This would improve the demand for Pantech’s products within the domestic and international markets. Pantech will prudently continue to focus on its existing revenue-generating businesses and seek opportunities to grow its businesses, both local and overseas, by enhancing its competitiveness as the major provider of pipes, valves, and fittings solutions to the oil and gas industries, related upstream and downstream industries.

In FY 2021 Pantech Stainless & Alloy Industries SB (PSA) and Pantech Galvanising SB (PGSB) saw the installation of new machineries to increase capacity and the ability to galvanise smaller fittings in greater volume respectively. The planned purchase of PGSB factory on an 2-acre land has been completed, and it now houses an efficient automated system with high productivity for mass products. Total CAPEX for the expansion works was approximately RM16m. The completion of the factory will bring additional revenue to the group going forward.

In addition to Petronas’ increasing its annual capex allocation from 5% to 9%, the spike in demand of pipes and valves for O&G and other applications should present strong prospects for Pantech.

Our BUY recommendation is premised on (i) pent up demand of pipes and valves due to high crude oil price amid the global energy crisis; (ii) cheap valuations; and (iii) attractive dividend yield.

Source: Rakuten Research - 10 Nov 2022