More Rapid orders expected to sustain Pantech’s strong earnings for FY19

This article first appeared in The Edge Financial Daily, on January 22, 2019.
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Pantech Group Holdings Bhd
(Jan 18, 46.5 sen)
Maintain buy with an unchanged target price (TP) of 71 sen:
Pantech Group Holdings Bhd’s third quarter of financial year 2019 (3QFY19) core net profit of RM11.2 million — quarter-on-quarter (q-o-q): -4.9%; year-on-year (y-o-y): +6.5% — was within estimates. The cumulative nine months of FY19 (9MFY19) core net profit of RM35.1 million (-2.9% y-o-y) was within our estimates but exceeded consensus estimates, accounting for 76% and 85% of our and consensus expectations.  

Revenue in 9MFY19 grew 0.3% y-o-y as domestic demand, especially from the refinery and petrochemical integrated development (Rapid), offset a revenue loss from the suspension of carbon steel exports to the US. Profitability margins remained largely unchanged q-o-q but grew slightly y-o-y due to a better product mix at Pantech’s trading division. Nevertheless, revenue and profit in the trading and manufacturing divisions declined slightly q-o-q. Pantech’s stainless steel plant was at a 90% utilisation rate.

We believe its carbon steel plant utilisation remains low at about 30% as the suspension of exports to the US remains. Moving forward, Pantech may use the underutilised capacity to secure orders from Southeast Asia and Malaysia. To recap, its carbon steel plant was at a 90% utilisation rate. Pantech’s Nautic steel plant’s utilisation rate remained stable at 60%, mildly positive for the group. On the other hand, Pantech’s galvanising plant recorded a 65% utilisation rate.  

The distribution of a treasury share for every 100 shares was declared for the quarter under review. This is equivalent to a dividend of 0.5 sen per share given the average acquisition cost of 51 sen per treasury share. This brings year-to-date (YTD) dividend to one sen per share, lower than FY18’s YTD dividend of two sen per share. We maintained our earnings forecasts.

On its outlook, the group’s strong earnings for FY19 are sustainable given a continued flow-in of Rapid orders; improved margins as demand increases; and improved plant utilisation rates as well as a turnaround at its galvanising plant. This is despite an anti-dumping duty imposed on Pantech. Nevertheless, uncertainties on the anti-dumping duty imposed by the US may result in Pantech losing about 20% of its revenue. However, after a meeting with management, we believe Pantech will be able to rectify this issue.

We maintained our TP of 71 sen based on 11 times calendar year 2019 (CY19) price-to-earnings ratio (PER). We believe the suspension of carbon steel exports to the US will be rectified. Decent dividend yields of 5.4% to 6.5% in FY19 to FY21 will cushion any downside risk. We maintained our “buy” call. — TA Securities, Jan 18