Pantech Group Holdings Bhd
(Oct 7, RM1.06)
Initiate coverage with target price of RM1.55: Pantech, which produces and supplies steel PVF, commands a 40% market share in Malaysia. More than 65% of its revenue is derived from customers in the upstream and downstream oil and gas (O&G) industry.
Pantech is poised to get a piece of this pie given its market lead, established track record and location in Pasir Gudang. If 5% of the RM87 billion project value is for PVF, and Pantech secures 2% of that, it would translate into RM1.7 billion in supply contracts from the PIPC over the next five years.
Pantech manufactures carbon steel, stainless steel and nickel alloy pipes and fittings. The stainless steel and nickel alloy business turned profitable recently, and boosted segment margins to about 19% in the first quarter of financial year 2015 ending February (1QFY15), from some 8% before FY13. This is expected to improve in the future as Pantech continues to gain market traction and focus on higher-value products.
For an O&G play, valuations are undemanding even after earnings per share (EPS) dilution, at 11 times FY15F and only 9 times FY16F earnings. This makes Pantech one of the cheapest small cap O&G plays in the market. We believe the stock will be rerated closer to peers’ average of 13 times price-earnings ratio, supported by 20% three-year compound annual growth rate, 4.4% dividend yield, and a clean balance sheet with only 0.3 times net gearing.
Our target price is pegged to 13x FY16F EPS, suggesting over 50% total return from current levels. Another positive for Pantech is that it might be included in the syariah-compliant list at the November review. — AlianceDBS Research, Oct 7
This article first appeared in The Edge Financial Daily, on October 8, 2014.