Review

• Pantech Group Holdings Bhd’s (PANTECH) 2QFY25 core net profit was above both ours and consensus forecasts. 1HFY25 core net profit of RM64.0mn (+29.6% YoY) came in at 64% of our full-year estimate and 57% of consensus forecasts. The outperformance was primarily driven by higher-than-expected export sales from its stainless-steel manufacturing plant, which posted a 23.4% QoQ revenue increase and a 10.6% QoQ rise in EBIT. However, the headline figures were softened by the impact of a weakening USD.

• The group proposed a first interim dividend of 1.5sen/share, same as corresponding period last year.

• YoY: 2QFY25 PBT declined by 21.3% YoY, primarily impacted by both the underperformance of the Trading and Manufacturing divisions. The Trading division's EBIT dropped significantly by 45.3% YoY, driven by lower sales to domestic oil and gas projects and foreign exchange losses arising from the translation of foreign currency-denominated financial assets. Meanwhile, the Manufacturing division saw a more modest decline of 3.7% YoY in EBIT, attributed to weaker export market performance and unfavourable foreign exchange rate movements. This occurred despite a 26.8% YoY revenue increase in Manufacturing division, supported by higher export sales from the stainless-steel manufacturing operations.

• QoQ: 2QFY25 PBT saw a QoQ decline of 18.2%, primarily due to a 46.0% QoQ drop in the Trading division's EBIT, driven by the same factors mentioned previously - lower sales to local oil and gas projects and foreign exchange losses. However, this was partially offset by a 10.6% QoQ increase in the Manufacturing division's EBIT, attributed to an improved product mix and higher export sales from the stainless-steel manufacturing operations.

Impact

• We increased ASP assumption by 5% on an account of steel price inflation. As a result, our FY25/FY26/FY27 earnings increased by 8.8%/12.7%/11.1%.

Outlook

• A stronger ringgit against the USD would result in lower revenue and EBIT, placing pressure on top-line growth—a trend already visible in this quarter's results. Should the USD continue to weaken, headline performance may show further softness. We estimate that for every 5% appreciation in the ringgit, PANTECH’s earnings could decline by approximately 4.3%.

• To recap, PANTECH plans to list its wholly-owned subsidiaries in the Manufacturing division, Pantech Stainless & Alloy Industries Sdn Bhd (PSA) and Pantech Steel Industries Sdn Bhd (PSI), on the Main Market via a special purpose vehicle, Pantech Global, by year-end. We make no changes to our earnings on this event, pending the completion of the listing exercise.

• Post-IPO, Pantech Group will retain a 69.15% ownership stake in Pantech Global. Assuming an IPO price of RM0.50 and a profit after tax (PAT) of RM50 million, we estimate Pantech Global to list at an 8.5x PE, implying a market capitalization of RM425.0mn. Existing Pantech shareholders will be entitled to IPO shares at a ratio of 1 share for every 25 existing ordinary shares held, which represents 4.1% of the enlarged share base. This listing is expected to result in immediate earnings dilution for Pantech Group, with an estimated impact of 1.8 sen/share, translating to a reduction of 14- 16% in our FY26 and FY27 earnings forecasts. The funds raised from the IPO are anticipated to support future earnings growth through expansion, though this potential has not yet been factored into our current earnings projections.

Valuation

• Reiterate Buy with a TP of RM1.17/share pegged to 8.5x CY25 EPS on account of a weaker USD environment (Previous: RM1.27/share pegged to 10x CY25 EPS). This is in-line with its historical average and Pantech Global’s projected listing PE. Our valuation factors in an ESG Premium of 3%. PANTECH presents as an attractive dividend play, offering more than 5.0% dividend yield for FY25-FY27, supported by free cash flow yield of above 10%.

Source: TA Research - 24 Oct 2024