Pantech’s FY14 net profit was  within our expectation,  mainly attributed to  improved  sales  and  higher  margin  at  the  manufacturing  division, which offset  the weaker contribution from  its  trading division. Earnings visibility  improved  as  local  O&G  activities  picked  up.  We  make  no changes to  our forecasts  and have yet to impute  any potentially   strong pickup at the trading division. Maintain BUY, and MYR1.25 FV.

• Spot on.  Pantech’s  FY14 net profit of MYR55.6m  was  spot on with  our forecast. Revenue from the  trading division  slid  19% y-o-y  as expected, mainly  attributed  to  weaker sales from the  oil and  gas  (O&G)  division,which  was  hit  by  slower  project  execution  and  higher  operating  costs. This  led to  a 43% y-o-y  decline in pretax profit. On a positive note, its manufacturing division continued to improve, posting a 6% y-o-y revenue growth,  driven  by  an  increase  in  manufacturing  output  at  all  its manufacturing  plants  to  meet  rising  local  and  export  sales  demand. Pretax  profit  at  the  manufacturing  division  surged  69%  y-o-y  on  an increase in niche product sales. The company declared a dividend of 1.0 sen for the quarter under review (cumulative FY14 dividend: 4.4 sen).
• Margin improves. The company’s strategy of focusing on higher-margin niche products boosted  its  overall net margin by 90  bps y-o-y  to 9.7%, which  kept  its  FY14  bottomline  resilient  despite  a  9.8%  y-o-y  drop  in group revenue.
• Beyond  the  horizon.  Pantech’s  FY14  earnings  were  affected  by  the slower execution of local O&G projects. However, with Petronas  recently giving  the green light to its much-awaited final investment decision (FID) for  the  Pengerang  integrated  complex  (PIC)  in  South  Johor  with  a commitment  of  USD27bn  (RM88.6bn)  –  of  which  the  refinery  and petrochemical  integrated  development  (RAPID)  is  a  key  component  –this could boost local O&G activities, which augurs well for Pantech.
• Maintain BUY.  We still like  Pantech  for its global  exposure to the O&G sector.  We  believe  its  strategy  of  focusing  on  manufacturing  niche products  may  further  improve  its  margin.  As  we  believe  its  trading division would eventually recover  given our house view that  local O&G activities would pick up in 2014, we expect potential earnings upside  for the  company  going  forward.  Maintain  BUY,  with  our  MYR1.25  FV unchanged  at  a 12x FY15F P/E,  which is  at  a discount to  O&G  stocks’average 15x P/E.

SWOT Analysis

Company Profile

Pantech is primarily involved in the manufacturing and trading of pipes, fittings and flow controls.

Recommendation Chart

Source: RHB