Pantech’s 1QFY16 (Feb) net profit of MYR9.1m fell short of our/street estimates but we make no change to our projection as we expect a stronger 2HFY16. Maintain NEUTRAL and a MYR0.79 TP (6.7% upside)as the recent pullback in oil prices may dent market sentiment on O&G counters. That said, it may partly be shielded from volatile oil prices as it has consistent pipe and fitting orders related to RAPID works.
Moderate pickup. Pantech posted a net profit of MYR9.1m in 1QFY16(+18.7% QoQ), which made up only 18.6%/17.2% of our/consensus full year estimates. The depressed oil prices over the last year hadundeniably affected its business, which is closely linked to the oil and gas (O&G) industry. While the company is a niche producer of carbon and stainless steel butt weld fittings, induction long bends and stainless steel pipes helped to prop up its sales volume for the manufacturing division – although its operating margin declined to 11.4% during the quarter. Fortunately, Pantech secured more local sales for its trading division, which booked a decent operating margin of 11.7% in 1QFY16.
RAPID – a key silver lining. Meanwhile, we are excited that Petronas has finally started the construction works for the USD16bn Refinery and Petrochemical Integrated Development (RAPID) project, following the steel-cutting ceremony on 15 Jun 2015. Pantech, being a local player, may win supply contracts that could be substantial over the next six years of construction. We understand that the company had already won some small supply contracts related to RAPID early this year. In addition, Pantech also supplies items for recurring maintenance works, which is less sensitive to oil price movements. As we expect the company to win more supply contracts from 2HFY16 onwards, we make no change in our profit estimates.
NEUTRAL, with a MYR0.79 TP. Although we are upbeat on Pantech’s long -term outlook, we prefer to be prudent at this juncture, as we anticipate a weaker business environment – at least in 1HFY16. Apart from that, the recent pullback in the price of crude oil to ~USD50 per barrel also may prompt investors to avoid the counter for the time being. Therefore, we keep our target FY16F P/E of 10x, to derive a TP ofMYR0.79. We remain NEUTRAL on the stock.
Source: RHB Research - 24 Jul 2015
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