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Wednesday, April 26, 2017

Pantech Group Holdings - Recovery Expected in FY18

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Review

  • Pantech’s FY17 core net profit of RM30.7mn (-15.3% YoY) was above our expectations and consensus’, accounting for 111% and 106% of full-year estimates respectively.
  • The better-than-expected earnings was due to higher-than-expected contributions from the trading division as demand from RAPID increased in 4QFY17. Revenue and operating profit from the trading division registered QoQ increase of 67.6% and >100% respectively. Also, note that profit in 4Q constitutes 37% of the group’s total net profit.
  • FY17 revenue decreased by 6.6% YoY as demand for Pantech’s products in 9M17 remained weak. Similarly, core net profit fell by 15.3% as margins were squeezed due to competitive pricing and reduced demand.
  • Going forward, we expect Pantech’s earnings to recover significantly as we see a pick-up in demand for its products.
  • To recap, management shared that its stainless-steel plant is working at full capacity, and have secured orders until mid-CY17. The group will be purchasing 4 new machines worth RM6mn-7mn for its stainless-steel plant. The expansion would increase capacity by 20%, and is expected to be completed in July this year.
  • Utilisation rate for Pantech’s Nautic steel plant remained flat at 60%. On the other hand, its carbon steel plant was fully utilised as demand for its products exceeded expectations.
  • Pantech proposed a final single tier dividend of 0.5 sen in 4QFY17, which brings FY17 payout to 1.8 sen. This implies 43% payout ratio (FY16: 2.7 sen, 53%).

Impact

  • We factor in higher utilisation rates for the carbon steel plant. Furthermore, we increase capacity for its stainless-steel plant, in-line with its expansion plan. Additionally, we include FY17 figures into our model. Thus, we increase our earnings forecasts for FY18/19 by 15.8%/16.0%.
  • We also introduce FY20 earnings of RM46.0mn, which implies a 10.4% growth as a result of the recovery in the oil and gas business.

Outlook

  • We expect the group’s earnings to recover in FY18 as: 1) more RAPID orders flow-in, 2) higher ASPs, as demand increases, and 3) capacity expansion and improved plant utilisation rates. That said, given the current environment, we do not discount the possibility of intense earnings volatility.
  • Moreover, its large cash pile (RM91.6mn), coupled with robust operating cash flow (circa RM25mn per quarter) enables Pantech to maintain dividend payouts.

Valuation

  • As a result of the more positive outlook, which include expansion plans and increased trading volume from RAPID, we increase our P/B multiple to 0.9x (previous: 0.7x). In addition, we roll forward our valuation base year to CY18. Following this, our TP is raised higher to RM0.69 (previous: RM0.52) based on 0.9x CY18 P/B. Maintain Buy.
Source: TA Research - 26 Apr 2017

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