Pantech Group Holdings Bhd
(Oct 12, 57 sen)
Maintain buy recommendation with a higher target price of 67 sen: According to Pantech Group Holdings Bhd’s management, demand for stainless steel products manufactured at the group’s plant in Pasir Gudang, Johor Baru, has increased dramatically in recent months. As a result, the plant is running at full capacity. However, Pantech is still studying ways to increase efficiency to meet demand.

That said, as a conservative measure, the group has not decided on any expansion plans yet. Management reckons the sudden increase in demand for its stainless steel products is due to Indonesian oil and gas (O&G) giant Pertamina increasing production and activities in Indonesia. We note that Pertamina’s O&G production has increased by 12.5% in the first half of financial year 2016 (1HFY16) compared to 1HFY15.

Pantech’s new warehouse at the Refinery and Petrochemical Integrated Development (Rapid) project site in Pengerang, Johor, has been a success. To recap, it built a smallish warehouse in FY16, near the Rapid project site for presence and brand visibility. We understand that the warehouse mainly caters for variation orders where clients purchase supplies on an urgent basis.

We believe margins for these products are higher as clients are less inclined to negotiate for discounts given the ad hoc nature. Hence, we believe when Rapid works at the site pick up pace, Pantech stands to benefit greatly from this warehouse. Currently, the bulk of construction is being done off-site and brought to Pengerang to be assembled.

In the first quarter of FY17, Pantech reported cash and cash equivalent balance of RM80.8 million with robust operating cash flow of RM25.1 million. As liquidity is a major concern for O&G players in the current environment, Pantech places emphasis on holding a large cash pile and collecting payments from its clients promptly. Consequently, it is in a better position to negotiate interest rates with banks.

Furthermore, management shared that it is always on the lookout for value acquisitions that complement its core business. Finally, Pantech’s cash pile enables it to effortlessly meet promised dividend payouts. Based on our estimates, it offers attractive dividend yields of 4.5% to 5.8% for FY17 to FY19, based on a 40% payout.

Management maintains its target for Rapid orders in FY17 of RM100 million to RM200 million. We understand that roughly RM50 million worth of Rapid orders was recognised in the first half of FY17 (1HFY17), and an additional RM100 million is expected in 2HFY17. Hence, we reiterate our view that Pantech will register a stronger second half on the back of improved traction in Rapid orders. — TA Securities, Oct 12