Pantech Group Holdings (47.5 sen) is upbeat on the outlook going forward and that its expansion plans are progressing on track. The recovery in demand for the company’s pipes, fittings and flow control (PFF) products is expected to gain traction, both in the domestic and export markets.
The company’s earnings results for 2QFebFY12 were broadly in line with our expectations.
Turnover improved to RM100.6 million, up 3.5% from the previous corresponding quarter and up 5.5% quarter-on-quarter (q-o-q). Trading sales accounted for roughly 60% of total turnover while the manufacturing arm contributed to the balance.
The recovery in domestic demand, which accounts for the bulk of the company’s trading sales, is still sluggish — although off the lows. As a result, margins from the trading arm are still at the lower end of its historical range.
Positively, we expect demand and profitability to gradually pick up steam over the next few quarters on the rollout of oil and gas (O&G) projects under the various government initiatives, including the Economic Transformation Programme (ETP).
The manufacturing arm, on the other hand, is doing comparatively better on strong recovery in overseas markets. Sales continued to trend higher to RM40.6 million in 2QFY12, up from RM30.2 million in 1QFY12 and RM25 million in 2QFY11.
The carbon steel manufacturing facility in Klang is operating at full capacity. Operations at the new stainless steel manufacturing plant in Johor Bahru are also progressing well. All six initial production lines are up and running at almost full capacity. The lines broke even at end-2QFY12 and should start to contribute positively in 2HFY12.
Lower losses from the new manufacturing plant more than offset the slight contraction in trading earnings before interest and tax (Ebit). Ebit for the manufacturing arm improved to about RM3.4 million in 2QFY12, up from RM1.3 million in the immediate preceding quarter.
As a result, net profit improved to RM7.2 million in the latest quarter, up from RM6.2 million in 1QFY12.
Cautiously optimistic on strengthening demand
Despite prevailing uncertainties over the global economic outlook, the company is maintaining its cautious optimism. Global economic growth is still positive, albeit revised lower from previously forecast numbers.
Prices of crude oil have held up well through the volatility in financial markets. Crude oil futures on the New York Mercantile Exchange are currently hovering around US$93 (RM289) per barrel, a level that is supportive of exploration and production activities in the O&G sector.
Even though prices of crude palm oil (CPO) have weakened, demand is still expected to remain fairly resilient. CPO futures on the Bursa Derivatives market are currently trading just under RM3,000 per tonne — well above the average production costs for plantation companies and thus, should continue to drive acreage expansion plans underpinned by expectations of rising demand.
The O&G and oil palm-related sectors collectively account for the bulk of Pantech’s sales for PFF control products.
Domestic demand to gain traction on robust O&G spending
As mentioned above, the recovery in domestic demand is still somewhat sluggish. Nevertheless, capital spending in the domestic O&G sector is expected to be quite robust for the foreseeable future.
The Malaysian government has pinpointed the sector as one of the key focus areas under its ETP, accounting for a substantial share of the total value of the projects that have been announced so far.
National oil company Petroliam Nasional Bhd intends to spend RM250 billion over the next five years to develop new projects, including marginal oilfields, as well as undertake enhanced oil recovery from existing oil fields.
Elsewhere, private sector projects such as Dialog Group Bhd’s Pengerang deepwater petroleum terminal are also expected to spur greater investment in the O&G-related sectors in the country going forward.
The gradual rollout of these projects will translate into greater demand for downstream support services, including demand for Pantech’s PFF products.
Manufacturing plants running near full capacity
Pantech’s manufacturing arm has recovered quite smartly from the slump in overseas demand in the aftermath of the global financial crisis. Sales hit a trough in 2QFY10 and have been trending higher since — despite the strengthening of the ringgit. The weaker US dollar translates into lower sales for the company in ringgit terms.
The company’s carbon steel PFF manufacturing facility in Klang is effectively running at full capacity. To cater to the expected demand growth, a factory is being built on a piece of land adjacent to its existing plant. The additional machinery to manufacture, primarily, high frequency induction long bends, are slated to commission by end-2011. The factory will also house a heat treatment facility.
Pantech is in the midst of adding machinery for another four lines at its new stainless steel facility. The additional lines will expand the current production range to include bigger-sized pipes and also fittings.
If all goes to plan, rated production capacity at this plant will rise to 13,500 tonnes per annum by early 2012 from the current 7,000 tonnes and will be reflected in the company’s FY13 earnings. Total capex is estimated at RM40 million and RM50 million for FY12-FY13 respectively.
The manufacturing arm has already secured a full order book for the rest of the current financial year. Plus, we expect margins to gradually widen — the initial six lines have broken even while the new lines should start to contribute positively by 2HFY13. They will also enjoy better economies of scale.
Looking to expand range to higher value alloy products
Looking further ahead into 2013, Pantech is actively exploring various options to further expand its range to encompass higher value and margin alloy products such as copper-nickel, duplex and super duplex pipes and fittings that are corrosion resistant.
The move would expand its customer base and market reach and is the final piece in Pantech’s five-year plan to hit the sales target of RM1 billion by FY15. The company expects manufacturing sales to account for at least 40% of total sales. Domestic demand will also account for a higher percentage of manufacturing sales, currently derived mainly from exports, as a result of import substitution.
Attractive valuations on growth prospects
Pantech’s well-laid out strategy should enable it to achieve double-digit annual growth over the next few years — based on the expected strengthening in demand that is supported by the company’s expansion plans.
Net profit is rising, albeit still at a gradual pace. This is due to pricing competition as there is currently excess capacity in the industry with demand just starting to pick up pace. Margins were also weighed down by startup costs at the company’s new stainless steel plant.
We believe that Pantech’s earnings will be much stronger in 2HFY12 compared with the RM13.5 million reported in the first half of its financial year. Net profit for the full year is estimated at RM37.7 million — up 30% from the RM29.4 million in FY11 — and is expected to grow further to RM46 million by FY13.
Based on our forecast, the stock is trading at very modest P/E valuations of only 5.7 and 4.6 times respectively for the two years. Plus, the stock is trading below its net asset of 72 sen per share as at end-August 2011.
Pantech’s valuations compare very favourably against most O&G stocks listed on the local bourse, as well as the broader market’s average valuations. Thus, we believe there is significant upside potential for Pantech, particularly for valuations with a slightly longer investment horizon.
Investors can also expect attractive yields
On top of potential capital gains, shareholders can also look forward to attractive yields.
Dividends totalled 3.3 sen per share in FY11. With stronger earnings going forward, we believe Pantech will gradually raise its dividends. We estimate dividends will rise to 3.5 sen per share in FY12, which will earn shareholders an attractive net yield of 7.4% at the current share price. This is well above the average yield for the broader market and prevailing interest rates on bank deposits.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
This article appeared in The Edge Financial Daily, November 2, 2011.
The company’s earnings results for 2QFebFY12 were broadly in line with our expectations.
Turnover improved to RM100.6 million, up 3.5% from the previous corresponding quarter and up 5.5% quarter-on-quarter (q-o-q). Trading sales accounted for roughly 60% of total turnover while the manufacturing arm contributed to the balance.
The recovery in domestic demand, which accounts for the bulk of the company’s trading sales, is still sluggish — although off the lows. As a result, margins from the trading arm are still at the lower end of its historical range.
Positively, we expect demand and profitability to gradually pick up steam over the next few quarters on the rollout of oil and gas (O&G) projects under the various government initiatives, including the Economic Transformation Programme (ETP).
The manufacturing arm, on the other hand, is doing comparatively better on strong recovery in overseas markets. Sales continued to trend higher to RM40.6 million in 2QFY12, up from RM30.2 million in 1QFY12 and RM25 million in 2QFY11.
The carbon steel manufacturing facility in Klang is operating at full capacity. Operations at the new stainless steel manufacturing plant in Johor Bahru are also progressing well. All six initial production lines are up and running at almost full capacity. The lines broke even at end-2QFY12 and should start to contribute positively in 2HFY12.
Lower losses from the new manufacturing plant more than offset the slight contraction in trading earnings before interest and tax (Ebit). Ebit for the manufacturing arm improved to about RM3.4 million in 2QFY12, up from RM1.3 million in the immediate preceding quarter.
As a result, net profit improved to RM7.2 million in the latest quarter, up from RM6.2 million in 1QFY12.
Cautiously optimistic on strengthening demand
Despite prevailing uncertainties over the global economic outlook, the company is maintaining its cautious optimism. Global economic growth is still positive, albeit revised lower from previously forecast numbers.
Prices of crude oil have held up well through the volatility in financial markets. Crude oil futures on the New York Mercantile Exchange are currently hovering around US$93 (RM289) per barrel, a level that is supportive of exploration and production activities in the O&G sector.
Even though prices of crude palm oil (CPO) have weakened, demand is still expected to remain fairly resilient. CPO futures on the Bursa Derivatives market are currently trading just under RM3,000 per tonne — well above the average production costs for plantation companies and thus, should continue to drive acreage expansion plans underpinned by expectations of rising demand.
The O&G and oil palm-related sectors collectively account for the bulk of Pantech’s sales for PFF control products.
Domestic demand to gain traction on robust O&G spending
As mentioned above, the recovery in domestic demand is still somewhat sluggish. Nevertheless, capital spending in the domestic O&G sector is expected to be quite robust for the foreseeable future.
The Malaysian government has pinpointed the sector as one of the key focus areas under its ETP, accounting for a substantial share of the total value of the projects that have been announced so far.
National oil company Petroliam Nasional Bhd intends to spend RM250 billion over the next five years to develop new projects, including marginal oilfields, as well as undertake enhanced oil recovery from existing oil fields.
Elsewhere, private sector projects such as Dialog Group Bhd’s Pengerang deepwater petroleum terminal are also expected to spur greater investment in the O&G-related sectors in the country going forward.
The gradual rollout of these projects will translate into greater demand for downstream support services, including demand for Pantech’s PFF products.
Manufacturing plants running near full capacity
Pantech’s manufacturing arm has recovered quite smartly from the slump in overseas demand in the aftermath of the global financial crisis. Sales hit a trough in 2QFY10 and have been trending higher since — despite the strengthening of the ringgit. The weaker US dollar translates into lower sales for the company in ringgit terms.
The company’s carbon steel PFF manufacturing facility in Klang is effectively running at full capacity. To cater to the expected demand growth, a factory is being built on a piece of land adjacent to its existing plant. The additional machinery to manufacture, primarily, high frequency induction long bends, are slated to commission by end-2011. The factory will also house a heat treatment facility.
Pantech is in the midst of adding machinery for another four lines at its new stainless steel facility. The additional lines will expand the current production range to include bigger-sized pipes and also fittings.
If all goes to plan, rated production capacity at this plant will rise to 13,500 tonnes per annum by early 2012 from the current 7,000 tonnes and will be reflected in the company’s FY13 earnings. Total capex is estimated at RM40 million and RM50 million for FY12-FY13 respectively.
The manufacturing arm has already secured a full order book for the rest of the current financial year. Plus, we expect margins to gradually widen — the initial six lines have broken even while the new lines should start to contribute positively by 2HFY13. They will also enjoy better economies of scale.
Looking to expand range to higher value alloy products
Looking further ahead into 2013, Pantech is actively exploring various options to further expand its range to encompass higher value and margin alloy products such as copper-nickel, duplex and super duplex pipes and fittings that are corrosion resistant.
The move would expand its customer base and market reach and is the final piece in Pantech’s five-year plan to hit the sales target of RM1 billion by FY15. The company expects manufacturing sales to account for at least 40% of total sales. Domestic demand will also account for a higher percentage of manufacturing sales, currently derived mainly from exports, as a result of import substitution.
Attractive valuations on growth prospects
Pantech’s well-laid out strategy should enable it to achieve double-digit annual growth over the next few years — based on the expected strengthening in demand that is supported by the company’s expansion plans.
Net profit is rising, albeit still at a gradual pace. This is due to pricing competition as there is currently excess capacity in the industry with demand just starting to pick up pace. Margins were also weighed down by startup costs at the company’s new stainless steel plant.
We believe that Pantech’s earnings will be much stronger in 2HFY12 compared with the RM13.5 million reported in the first half of its financial year. Net profit for the full year is estimated at RM37.7 million — up 30% from the RM29.4 million in FY11 — and is expected to grow further to RM46 million by FY13.
Based on our forecast, the stock is trading at very modest P/E valuations of only 5.7 and 4.6 times respectively for the two years. Plus, the stock is trading below its net asset of 72 sen per share as at end-August 2011.
Pantech’s valuations compare very favourably against most O&G stocks listed on the local bourse, as well as the broader market’s average valuations. Thus, we believe there is significant upside potential for Pantech, particularly for valuations with a slightly longer investment horizon.
Investors can also expect attractive yields
On top of potential capital gains, shareholders can also look forward to attractive yields.
Dividends totalled 3.3 sen per share in FY11. With stronger earnings going forward, we believe Pantech will gradually raise its dividends. We estimate dividends will rise to 3.5 sen per share in FY12, which will earn shareholders an attractive net yield of 7.4% at the current share price. This is well above the average yield for the broader market and prevailing interest rates on bank deposits.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
This article appeared in The Edge Financial Daily, November 2, 2011.
