Pantech’s FY17 core net profit of RM30.7mn (-15.3% YoY) was above our expectations and consensus’, accounting for 111% and 106% of full-year estimates respectively.
The better-than-expected earnings was due to higher-than-expected contributions from the trading division as demand from RAPID increased in 4QFY17. Revenue and operating profit from the trading division registered QoQ increase of 67.6% and >100% respectively. Also, note that profit in 4Q constitutes 37% of the group’s total net profit.
FY17 revenue decreased by 6.6% YoY as demand for Pantech’s products in 9M17 remained weak. Similarly, core net profit fell by 15.3% as margins were squeezed due to competitive pricing and reduced demand.
Going forward, we expect Pantech’s earnings to recover significantly as we see a pick-up in demand for its products.
To recap, management shared that its stainless-steel plant is working at full capacity, and have secured orders until mid-CY17. The group will be purchasing 4 new machines worth RM6mn-7mn for its stainless-steel plant. The expansion would increase capacity by 20%, and is expected to be completed in July this year.
Utilisation rate for Pantech’s Nautic steel plant remained flat at 60%. On the other hand, its carbon steel plant was fully utilised as demand for its products exceeded expectations.
Pantech proposed a final single tier dividend of 0.5 sen in 4QFY17, which brings FY17 payout to 1.8 sen. This implies 43% payout ratio (FY16: 2.7 sen, 53%).
Impact
We factor in higher utilisation rates for the carbon steel plant. Furthermore, we increase capacity for its stainless-steel plant, in-line with its expansion plan. Additionally, we include FY17 figures into our model. Thus, we increase our earnings forecasts for FY18/19 by 15.8%/16.0%.
We also introduce FY20 earnings of RM46.0mn, which implies a 10.4% growth as a result of the recovery in the oil and gas business.
Outlook
We expect the group’s earnings to recover in FY18 as: 1) more RAPID orders flow-in, 2) higher ASPs, as demand increases, and 3) capacity expansion and improved plant utilisation rates. That said, given the current environment, we do not discount the possibility of intense earnings volatility.
Moreover, its large cash pile (RM91.6mn), coupled with robust operating cash flow (circa RM25mn per quarter) enables Pantech to maintain dividend payouts.
Valuation
As a result of the more positive outlook, which include expansion plans and increased trading volume from RAPID, we increase our P/B multiple to 0.9x (previous: 0.7x). In addition, we roll forward our valuation base year to CY18. Following this, our TP is raised higher to RM0.69 (previous: RM0.52) based on 0.9x CY18 P/B. Maintain Buy.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....