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Saturday, May 17, 2014

Pantech - Some 15% of Petronas' RM90bil Pengerang complex likely to go to pipes, valves and fittings


PETROLIAM Nasional Bhd’s (Petronas) Refinery and Petrochemical Integrated Development (Rapid), which will see the national oil firm pump close to RM90bil into a massive petrochemical complex in Pengerang, Johor, is widely expected to spur a slew of downstream players in the local oil and gas (O&G) supply chain.
While the big boys such as Petronas Gas BhdDialog Group Bhd and Muhibbah Engineering (M) Bhd are some of the obvious winners, lesser-known Pantech Group Holdings Bhd, analysts say, has a good chance of securing the bulk of the jobs for pipes, valves and fittings (PVF), by virtue of it being Malaysia’s only one-stop centre for integrated PVF solutions.
According to industry officials, the RM260mil contract awarded to Barakah recently for the laying of gas pipelines in Pengerang is a promising sign of things to come.
About 60% of the contract value is likely to be set aside for the purchase of pipes.
Pantech executive director Adrian Tan tells StarBizWeek in an interview that some 15% of the capital expenditure allocated to Rapid is estimated to be used for its PVF needs.
Not all of this will go to Pantech, Tan says, but it has laid the groundwork to bag a good chunk of the orders.
Pantech’s clients who had been eyeing Rapid-related work had earlier sought quotations from the company as early as the fourth quarter of last year, ahead of Petronas’ long-awaited final investment decision (FID) on Rapid in early-April.
“Even when Rapid was on the drawing board, we were actively involved in talks with our vendors and suppliers,” Tan explains.
Margins for PVF contracts in Rapid could range between 10% and 40%, but will ultimately depend on the specific design and requirements, says Tan.
Pantech’s competition in the PVF space is mainly Singaporean firms, but they are largely traders and not manufacturers, according to Tan.
“Locally, there are Malaysian firms that sell pipes but not valves, and vice versa.
“Pantech does not compete only on price. As a one-stop centre, we supply not just pipes or fittings, but also the technology and technical expertise.”
TA Research analyst tells StarBizWeek that Rapid is a long-term growth story for Pantech, with the front-end contracts awarded to the main contractors likely to take some time before trickling down to Pantech.
Tan concedes that Rapid, which is slated to be commissioned in 2019, will take six years to complete, meaning orders will be staggered.
The delay in Rapid from its original start-up date of 2016 was at least partly to blame for Pantech’s results in the financial year ended Feb 28, 2014, (FY14), when revenue tumbled 10% to RM574.94mil from RM635.66mil a year earlier.
Niche products
Net profit, however, was flat at RM55.78mil, as a surge in its manufacturing profits helped lift an otherwise lacklustre year for Pantech.
Although trading revenue slid 19% on the back of weaker sales of O&G products, its manufacturing arm grew revenue and profit by 6% and 69%, respectively, due to improved sales of higher margin niche products from its UK subsidiary, Nautic Steel, which the group acquired in 2012.
Pantech’s core business is the trading of high pressure seamless and specialised steel pipes, fitting and flow control products for the O&G, marine, power generation, refinery, petrochemical and palm oil industries.
But much of its growth will hinge on the manufacturing segment, which makes PVF products used in extreme temperature and severe corrosive environments like O&G and desalination plants.
In FY14, sales from the trading division came in at RM328.1mil versus manufacturing’s RM299mil. But the latter recorded an operating profit of RM45.8mil, besting the RM39mil Pantech earned from trading.
Buoyed by Nautic, Pantech’s pretax profit margins in the manufacturing arm have more than doubled to 18.7% as at end-February compared with 8.5% in the first quarter of FY13 (see chart).
Tan notes that the company is targeting an even split between its trading and manufacturing businesses. “In a way, we can ‘control our destiny’ with manufacturing. It gives us long-term certainty, whereas with trading, we could lose out to those with bigger volumes or cheaper products,” he quips.
The group is also expanding its client base overseas from the current 59 countries. Almost 50% of its products are exported.
Brazil, in particular, is one to watch. Tan points out that the over 150 oil rigs operating in Brazilian waters are undergoing a major revamp of their firefighting equipment.
“Seawater (used as water supply in sprinkler systems for offshore oil rigs) is corrosive. Even stainless steel, which is supposed to be non-corrosive, will experience pinhole rusts if perpetually filled with seawater.
“But copper nickel lasts up to 30 years. Nautic produces this for firefighting equipment in oil rigs, power plants and floating production units.
“Nautic is one of the few in the world with the technology to make corrosive-resistant nickel alloy pipes and fittings,” explains Tan.
All this comes on the back of a flurry in exploration and production activity in Brazil as it prepares to develop the Americas’ largest O&G discoveries in four decades.
Tan says Petrobras, the state-owned O&G giant, has found that it is running at only 60% capacity and wants to raise production benchmarks.
Brazil, Latin America’s largest economy, could ramp up its oil production, which averaged 2.7 million barrels per day (bpd) last year, to 4 million bpd by 2020, some estimates show.
The International Energy Agency forecasts that Brazil could triple its oil production by 2035, or 6 million bpd. Its natural gas production is seen expanding more than fivefold.
Already, Tan says Pantech’s sales to Brazil have tripled since Nautic was acquired, and he is confident of clinching more orders.
Even if demand were to soften, he says Pantech can count on recurring income from the replacement market, which makes up about 40% of its total sales each year.
By FY16, Pantech intends to double Nautic’s production capacity to 1,000 tonnes per annum from about 500 tonnes when it became part of the group.
Spare capacity
Meanwhile, all eyes will be on the outcome of the US anti-dumping tribunal, which is due on July 1.
Three countries – Malaysia, Vietnam and Thailand – had been accused of dumping cheap steel product into the United States last year, putting an abrupt halt to Pantech’s exports of stainless steel pipes there.
Tan reiterates Pantech’s stand that the suit is baseless, and questions the metrics used to prove that dumping had occurred.
For now, he says Malaysia has a 50:50 chance of the Department of Commerceruling in its favour. Pantech had previously exported about 30% of its stainless steel production to the United States.
The firm’s sales in the latter half of FY14 took a hit from the sanctions.
Instead of sitting on its hands, Pantech had over the past year increased its production of fittings – which yield better margins and are not affected by the anti-dumping measures – to 120 tonnes from 50 tonnes. Production is expected to reach 200 tonnes by the end of the year, Tan says.
And because it had spare capacity, Pantech used the opportunity to make further inroads into the Asean region, for example by bagging its maiden contract with Indonesia’s state-controlled Pertamina last July to supply induction long bends worth RM4.8mil.
Consensus forecasts show that Pantech’s core net profit could climb to RM60.3mil in FY15 and accelerate to RM75mil the following year, versus RM55.8mil in FY14, implying growth of 8% and 34% over the next two years.
At its current price, the stock trades at a single-digit price-to-earnings multiple, making it one of the cheapest proxies to the O&G sector. Its gearing ratio stands at 41%.
In a client note dated April 25, TA Research maintained its “buy” call on Pantech with a target price of RM1.22, citing its cheap valuation of nine times 2014 earnings versus the sector average of 22 times, dividend yield of 4.6%, low payout ratio of 40% and minimal capital expenditure needs, which bodes well for future dividends.
The counter closed Thursday at 98.5 sen, up 1% year-to-date.

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