Review

• Pantech’s 9MFY17 core net profit of RM19.3mn (-27.6% YoY) was below our expectations and consensus’, accounting for 55% and 58% of full-year estimates respectively.

• The earnings miss was due to intense competition amidst weaker demand, which reduced ASPs and ultimately squeezed margins significantly.

• YTD, operating margins contracted by 2ppt and 3ppt for the trading and manufacturing segments respectively. On the other hand, sequential operating margins were slightly better in 3QFY17, with expansion of 2ppt/3ppt for the trading/manufacturing segments. Nevertheless, it was unable to offset a weak 1HFY17 as previously expected.

• Additionally, revenue in 3QFY17 was subdued, and declined 4.6% QoQ and 31.2% YoY as demand for Pantech’s products (besides stainless steel products) remained weak.

• Conversely, core net profit was higher at RM6.4mn (QoQ: 28.4%, YoY: - 47.7) compared to 2QFY17 due to margin expansion, underpinned by higher other operating income (realised forex, interest income, etc.) and better margins across both segments.

• We expect Pantech’s 4QFY17 and FY18 to be significantly better as 1) stronger crude oil price of USD50/bbl improves sentiment, and hence increases demand for the Group’s products, and 2) contribution from its stainless-steel plant increases.

• To recap, management shared that its stainless steel plant is working at full capacity, and have secured orders until mid-CY17. Furthermore, the Group expects to recognise RM100mn from RAPID orders in FY17 (YTD: RM75mn) and RM150mn in FY18.

• QoQ, utilisation rates for Pantech’s carbon steel and Nautic steel plants dropped slightly to 65% and 55% from 70% and 60% respectively. On the other hand, its stainless steel plant in Pasir Gudang reached 100% utilisation rate as demand for its fittings exceeded expectations.

• Pantech announced a third interim dividend of 0.3 sen in 3QFY17, which brings YTD payout for FY17 to 1.3 sen and implies 41% payout ratio (YTD FY16: 1.6 sen, 32%).

Impact

• We adjust our EPS following issuance of the one for five bonus shares on 22 Dec 2016.

• Additionally, we cut our earnings forecast for FY17/18/19 by 21.1%/29.0%/28.2% after we 1) Reduced trading and manufacturing sales and 2) Accounted for margin compression, in-line with the results.

Outlook

• We expect the Group’s earnings to improve steadily going forward as more RAPID orders flow-in, and demand increases as a result of higher crude oil price. That said, given the current environment, we do not discount the possibility of intense earnings volatility.

• Moreover, its large cash pile (RM88.1mn) coupled with robust operating cash flow (circa RM25mn per quarter) will allow Pantech to maintain dividend payouts.

Valuation

• Due to near-term earnings volatility, we revise our valuation methodology to P/B (previously: PER). This is consistent with other oil and gas stocks under our coverage.

• Therefore, our TP is reduced to RM0.52 (from RM0.53) based on 0.7x CY17 P/B. This implies a 0.2x discount to our oil and gas bellwether SapuraKencana Petroleum. We deem the discount justified as Pantech has a smaller market cap with less direct exposure to crude oil price.

• Maintain Buy on Pantech where downside is cushioned by decent dividend yield of 3.2%-4.2% in FY17-19. Key risks to our call include slower than expected recognition of RAPID orders and sustained margin compression.

Source: TA Research - 13 Jan 2017