Review

• Pantech Group Holdings Bhd’s (PANTECH) 9MFY25 core net profit of RM91.3mn (+30.8% YoY) came in at 92% of our full-year estimate and 82% of consensus forecasts. The stronger-than-expected performance from the trading division was driven by an increase of revenue (+14.3% QoQ) from the increase sales delivery to local oil and gas industry and higher EBIT (+48.6% QoQ) due to lower operating costs, which boosted the operating margin by 2.5%-points on a QoQ basis.

• The group proposed a third interim dividend of 1.5sen per share, marking the 12th consecutive payout at this level.

• YoY: 3QFY25 PBT increased by 2.0% YoY, primarily impacted by the stronger performance from the Trading divisions. The Trading division's EBIT increase significantly by 42.9% YoY, driven by higher sales delivery to local oil and gas industry and better product mix. However, the manufacturing division recorded lower EBIT (-16.9% YoY) mainly due to loss incurred by the overseas manufacturing plant. This is despite the improvement of manufacturing division’s revenue (+9.6% YoY), mainly driven by higher export revenue from stainless steel manufacturing plant.

• QoQ: 3QFY25 PBT saw a QoQ decline of 5.3%, primarily due to a 25.3% QoQ drop in the Manufacturing division's EBIT, driven by the same factor mentioned previously—loss incurred by the overseas manufacturing plant. However, this was partially offset by a 48.5% QoQ increase in the Trading division's EBIT, attributed to an improved product mix and higher sales delivery to local oil and gas industry.

Impact

• For the trading division, we have adjusted our operating margin assumptions upward by 3%-points and revenue growth by 4%-points, reflecting the strong performance in 3QFY25 and extrapolating this trend through FY27. As a result, our earnings forecasts for FY25/FY26/FY27 have been increased by 22.9%/23.9%/25.1%, respectively.

Outlook

• Global capital expenditure in the oil and gas sector is projected to remain resilient, with sustained investments in facility maintenance, upgrades, and development projects, supported by steady oil prices (2025 Brent crude forecast: USD75/b). This trend is likely to boost demand for related products and services worldwide.

• 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. 

• Post-IPO, Pantech Group will retain a 69.15% stake in Pantech Global. For FY24, Pantech Global reported a PAT of RM49.7mn. We estimate a listing valuation of 10-12x PE, translating to a market cap range of RM500mn to RM597mn. Existing Pantech shareholders are entitled to subscribe Pantech Global’s IPO shares at a ratio of 1 share for every 25 ordinary shares held, representing 4% of the enlarged share base. The listing is expected to result in immediate earnings dilution for Pantech Group, with an estimated impact of 1.8sen/share, reducing our FY26-FY27 earnings forecasts by 14- 16%. The IPO proceeds are expected to support future earnings growth through expansion, though this potential has not yet been incorporated into our projections.

Valuation

• In line with our revised earnings forecast, we have updated our TP to RM1.28 per share (previously RM1.17 per share), based on an 8.5x CY25 EPS and an ESG Premium of 3%. However, we expect a downward adjustment in valuation due to earnings dilution from the listing of Pantech Global once it materializes, which will be addressed in our next report. Nonetheless, PANTECH continues to be an attractive dividend play, offering a dividend yield of over 5.0% for FY25-FY27, supported by a free cash flow yield of more than 10%. Maintain Buy.

Source: TA Research - 27 Jan 2025