Pantech Group Holdings’ (55 sen) earnings have been improving in the last three consecutive quarters. Net profit improved from RM5.1 million in 4QFY11 to RM6.2 million and RM7.2 million in 1QFY12 and 2QFY12, respectively. Net profit expanded further to RM10.3 million in the latest 3QFY12.
We expect this trend to persist through 2012 and beyond on the back of upbeat forecasts for the oil and gas (O&G) sector.
To be sure, there are some concerns that global economic growth could stall, especially if the debt crisis in the eurozone worsens further. But recent economic data out of the US show that the world’s largest economy is in better shape than previously expected.
With the US job market on the mend, rising consumer confidence will underpin consumption, which accounts for 70% of the country’s economic activities. Many expect China to gradually loosen monetary policy to spur domestic consumption and counter slower external demand. At the moment, most expect the government to succeed in engineering a soft landing for the world’s second largest economy.
Therefore, the global economy is still expected to register positive growth, albeit at a more modest pace. This bodes well for demand for oil. Indeed, prices for crude oil have held up well through the recent volatility in financial markets. Crude oil futures on the New York Mercantile Exchange are currently hovering around US$97 per barrel, a level that is supportive of exploration and production activities in the O&G sector.
Anecdotal evidence suggests that oil majors are ratcheting up their capital spending. Case in point, our national oil company, Petroliam Nasional Bhd, intends to spend some RM250 billion over the next five years to develop new projects, including marginal oilfields, and undertake enhanced oil recovery from existing oilfields.
We expect demand for downstream support services and equipment — such as the pipes, fittings and flow control products sold by Pantech — to gain traction, both in the domestic and export markets.
3QFY12 results underpin outlook improvement
Pantech’s latest earnings results for 3QFY12 ending February underscore the company’s strengthening outlook.
Total sales were up 49.4% year-on-year (y-o-y) and 12% quarter-on-quarter (q-o-q) to RM112.7 million, underpinned by improving demand in both the domestic and export markets.
Trading sales, which accounted for some 64% of the company’s total sales in the quarter, expanded to RM72.1 million, up from RM60 million in 2QFY12. We estimate roughly 80% to 85% of trading sales are for domestic consumption.
Local demand is expected to improve further in 2012 as more O&G projects under the various government initiatives, including the Economic Transformation Programme, are rolled out.
Export sales did quite well too, holding at some RM40.6 million in 3QFY12 on the back of fairly resilient export demand — despite the increased global economic uncertainties triggered by the deteriorating debt crisis in Europe.
The carbon steel manufacturing facility in Klang, Selangor, is running at full capacity while Pantech’s current six production lines at the new stainless steel plant are also nearing full utilisation. However, the latter remains in the red in the latest quarter. We had expected the new lines to be breaking even by end-3QFY12.
This slight delay in turning a profit was due to falling raw material prices globally, including nickel. Nickel is a key component in influencing prices for stainless steel products. Heightened concern over the eurozone crisis and health of the global economy sent commodity prices tumbling in 2H11 as investors shunned risky assets. The average price for nickel in November 2011 was almost 25% lower than that in July 2011. As a result, Pantech’s margins were squeezed by higher stock cost in an environment of weakening selling prices.
Positively, improvement in the trading arm and resilient earnings from carbon steel manufacturing more than offset losses at the stainless steel plant. Net profit in 3QFY12 rose to RM10.3 million, up 67% y-o-y and 43% from the immediate preceding quarter.
Solid order book on the back of rising demand
Pantech’s order book for its carbon steel products runs up to June 2012 while that for stainless steel products is full till April 2012. Orders for the latter are shorter term at the moment due to the more volatile price fluctuations.
Prices for nickel appear to have bottomed out at end-November 2011 and have rebounded by more than 20% from the lowest point. A more stable price for the raw material this year would bode well for Pantech’s margins. The recent strengthening of the US dollar against the ringgit will also translate into higher export sales for the company. Hence, we do expect the first six stainless steel production lines to start turning a profit soon.
Pantech is slated to complete its near-term capacity expansions over the next one or two months. The additional machinery to manufacture primarily high frequency induction long bends, at the Klang facility are in place and will commission by end-FY12.
Three of the four additional production lines in the new stainless steel plant are nearing completion. The final line is expected to be up and running by April 2012.
The four new lines will expand its current production range to include larger pipes and fittings. Production at this plant is estimated to rise to 12,000 tonnes per year in FY13, from the current 7,000.
Elsewhere, Pantech is actively exploring various options to further expand its product range to encompass higher value and margin alloy products such as copper-nickel, duplex and super duplex pipes and fittings that are corrosion resistant. This may include acquisitions and/or expansion at its local manufacturing plant.
Attractive valuations on robust growth prospects
Pantech’s well laid out strategy should enable it to achieve strong 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 for FY12 is estimated at RM36.2 million, up 25% from the RM29 million in FY11, which is expected to expand further to RM49.9 million in FY13.
Based on our forecast, the stock is trading at very modest price-earnings ratios of only 6.8 and five times for the two financial years, or about 5.3 times our annualised earnings for 2012. In addition, the stock is trading below its net assets of 74 sen per share as at end-November 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 those with a slightly longer investment horizon. On top of potential capital gains, shareholders can also look forward to attractive yields.
Dividends totalled 3.3 sen per share in FY11. For FY12, Pantech has paid an interim dividend of one sen per share and has announced a second interim dividend of 1.2 sen per share. The stock will trade ex-entitlement on Feb 27.
For the full-year, we estimate dividends will total 3.5 sen per share, higher in line with the stronger earnings. This will earn shareholders an attractive net yield of 6.4% at the current share price. We estimate dividends will increase further to four sen per share in FY13, giving a net yield of 7.3%.
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, February 8, 2012.
We expect this trend to persist through 2012 and beyond on the back of upbeat forecasts for the oil and gas (O&G) sector.
To be sure, there are some concerns that global economic growth could stall, especially if the debt crisis in the eurozone worsens further. But recent economic data out of the US show that the world’s largest economy is in better shape than previously expected.
With the US job market on the mend, rising consumer confidence will underpin consumption, which accounts for 70% of the country’s economic activities. Many expect China to gradually loosen monetary policy to spur domestic consumption and counter slower external demand. At the moment, most expect the government to succeed in engineering a soft landing for the world’s second largest economy.
Therefore, the global economy is still expected to register positive growth, albeit at a more modest pace. This bodes well for demand for oil. Indeed, prices for crude oil have held up well through the recent volatility in financial markets. Crude oil futures on the New York Mercantile Exchange are currently hovering around US$97 per barrel, a level that is supportive of exploration and production activities in the O&G sector.
Anecdotal evidence suggests that oil majors are ratcheting up their capital spending. Case in point, our national oil company, Petroliam Nasional Bhd, intends to spend some RM250 billion over the next five years to develop new projects, including marginal oilfields, and undertake enhanced oil recovery from existing oilfields.
We expect demand for downstream support services and equipment — such as the pipes, fittings and flow control products sold by Pantech — to gain traction, both in the domestic and export markets.
3QFY12 results underpin outlook improvement
Pantech’s latest earnings results for 3QFY12 ending February underscore the company’s strengthening outlook.
Total sales were up 49.4% year-on-year (y-o-y) and 12% quarter-on-quarter (q-o-q) to RM112.7 million, underpinned by improving demand in both the domestic and export markets.
Trading sales, which accounted for some 64% of the company’s total sales in the quarter, expanded to RM72.1 million, up from RM60 million in 2QFY12. We estimate roughly 80% to 85% of trading sales are for domestic consumption.
Local demand is expected to improve further in 2012 as more O&G projects under the various government initiatives, including the Economic Transformation Programme, are rolled out.
Export sales did quite well too, holding at some RM40.6 million in 3QFY12 on the back of fairly resilient export demand — despite the increased global economic uncertainties triggered by the deteriorating debt crisis in Europe.
The carbon steel manufacturing facility in Klang, Selangor, is running at full capacity while Pantech’s current six production lines at the new stainless steel plant are also nearing full utilisation. However, the latter remains in the red in the latest quarter. We had expected the new lines to be breaking even by end-3QFY12.
This slight delay in turning a profit was due to falling raw material prices globally, including nickel. Nickel is a key component in influencing prices for stainless steel products. Heightened concern over the eurozone crisis and health of the global economy sent commodity prices tumbling in 2H11 as investors shunned risky assets. The average price for nickel in November 2011 was almost 25% lower than that in July 2011. As a result, Pantech’s margins were squeezed by higher stock cost in an environment of weakening selling prices.
Positively, improvement in the trading arm and resilient earnings from carbon steel manufacturing more than offset losses at the stainless steel plant. Net profit in 3QFY12 rose to RM10.3 million, up 67% y-o-y and 43% from the immediate preceding quarter.
Solid order book on the back of rising demand
Pantech’s order book for its carbon steel products runs up to June 2012 while that for stainless steel products is full till April 2012. Orders for the latter are shorter term at the moment due to the more volatile price fluctuations.
Prices for nickel appear to have bottomed out at end-November 2011 and have rebounded by more than 20% from the lowest point. A more stable price for the raw material this year would bode well for Pantech’s margins. The recent strengthening of the US dollar against the ringgit will also translate into higher export sales for the company. Hence, we do expect the first six stainless steel production lines to start turning a profit soon.
Pantech is slated to complete its near-term capacity expansions over the next one or two months. The additional machinery to manufacture primarily high frequency induction long bends, at the Klang facility are in place and will commission by end-FY12.
Three of the four additional production lines in the new stainless steel plant are nearing completion. The final line is expected to be up and running by April 2012.
The four new lines will expand its current production range to include larger pipes and fittings. Production at this plant is estimated to rise to 12,000 tonnes per year in FY13, from the current 7,000.
Elsewhere, Pantech is actively exploring various options to further expand its product range to encompass higher value and margin alloy products such as copper-nickel, duplex and super duplex pipes and fittings that are corrosion resistant. This may include acquisitions and/or expansion at its local manufacturing plant.
Attractive valuations on robust growth prospects
Pantech’s well laid out strategy should enable it to achieve strong 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 for FY12 is estimated at RM36.2 million, up 25% from the RM29 million in FY11, which is expected to expand further to RM49.9 million in FY13.
Based on our forecast, the stock is trading at very modest price-earnings ratios of only 6.8 and five times for the two financial years, or about 5.3 times our annualised earnings for 2012. In addition, the stock is trading below its net assets of 74 sen per share as at end-November 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 those with a slightly longer investment horizon. On top of potential capital gains, shareholders can also look forward to attractive yields.
Dividends totalled 3.3 sen per share in FY11. For FY12, Pantech has paid an interim dividend of one sen per share and has announced a second interim dividend of 1.2 sen per share. The stock will trade ex-entitlement on Feb 27.
For the full-year, we estimate dividends will total 3.5 sen per share, higher in line with the stronger earnings. This will earn shareholders an attractive net yield of 6.4% at the current share price. We estimate dividends will increase further to four sen per share in FY13, giving a net yield of 7.3%.
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, February 8, 2012.
