Pantech booked  flattish earnings  of MYR13.6m (-1.3% y-o-y) in  1QFY15 on  weaker  revenue  (-19.5%  y-o-y),  due  to  slower  sales  from  both  its trading and manufacturing divisions. On a  brighter note,  its net margin improved  1.9ppts  y-o-y,  mainly  due  to  the  continuous  improvement from  its  manufacturing  unit.  While  we  anticipate  a  stronger  2H,  we downgrade the stock to NEUTRAL (vs Buy) but keep our FV at MYR1.25.

In  line.  Pantech’s 1QFY15 net profit of  MYR13.6m (-1.3% y-o-y), which made up 23% of our full-year forecast, came in line with our expectations –  we had  earlier highlighted that stronger growth may come in only by2H.  Overall  revenue in 1QFY15 slipped by 19.5% y-o-y due to weaker local sales from its  trading division (-5.6% y-o-y)  and lower export sales from  its  manufacturing  segment  (-32.8%  y-o-y).  Despite  the  lower revenue, the company was still able to report a comparable profit, with its net margin improving by 1.9ppts y-o-y  to 10.4%. This was mainly due to higher contribution from its stainless steel division as well as  the  lower operating  expenses  of  the  trading  division,  compared  with  the  same quarter  last  year  where  an  additional  provision  for  slow-moving  debts was made. A 1-sen single-tier interim dividend was declared.

Stainless steel plant is profitable.  The  US has imposed anti-dumping duties  on  exported  steel  pipes  from  Malaysia,  Thailand  and  Vietnam.However, this does not result in any revenue or earnings contraction  to the company,  as Pantech  stopped exporting stainless steel pipes to  the US in  July 2013.  Moreover, even without exporting  stainless steel pipes to the US, its stainless steel plant is in the black as it is still able to exportto other countries such as Indonesia.

Downgrade  to  NEUTRAL.  We  maintain  our  earnings  forecast  but downgrade the stock to NEUTRAL (from Buy) due to the limited upside. Our  unchanged  MYR1.25  FV  remains  pegged  to  12x  FY15F  PE  (vs Malaysian small-cap O&G counters’ average P/E of 15x). We continue to be  positive  on  Pantech’s  long-term  growth,  due  to:  i)  the  Refinery  and Petrochemical  Integrated  Development  (RAPID)  project,  ii)  potential synergistic  M&As,  and  iii)  the  continuous  improvement  in  its manufacturing sales and margin  as the company has  just installed new machines for its subsidiary,  Nautic Steels  Ltd, to improve  its  product mixand efficiency.

Source: RHB