Pantech Group Holdings Berhad

Transcription

1 2QFYFeb2018 Results 25 October 2017 Pantech Group Holdings Berhad Recovery trend continues in 2QFY18 Sustained demand on stable oil prices Stainless steel mills utilisation up to 90% Galvanising plant to break-even by end-2017 Price RM0.71 Market capitalization RM528 million Board Main BUY Key stock statistics FYFeb17 FYFeb18E EPS (sen) P/E (x) Net DPS (sen) NTA/share (RM) Issued capital (mil) week price range (RM) Major shareholders (%) CTL Capital Holdings 22% GL Management Agency 17% Share Price Chart Indices FBMS Sector Trading/Services Stock code 5125 Analyst The Research Team

2 2QFYFeb2018 Earnings Highlights Year end Feb 2Q18 2Q17 % chg Turnover EBIT Interest inc/(exp) (1.9) (1.1) 72.7 Extraordinary loss/(gain) (0.0) (0.0) 50.0 Pre-tax profit Tax Net profit EPS (sen) Operating margin (%) Pre-tax margin (%) Net margin (%) Effective tax rate (%) Pantech Group Holdings earnings results for 2QFYFeb2018 were broadly in line with our expectations. Both sales and net profit were higher compared with the previous corresponding quarter. Indeed, the latest results underlined a sustainable recovery for the company. Net profit stood at RM11.8 million. This is lower than the RM14 million reported in 1QFY18. We attribute this to the lesser number of working days (Hari Raya holidays) as well as slight change in product mix during the quarter. Note also that 1QFY18 was the company s strongest quarterly earnings since 4QFY14 (before oil prices collapsed in mid-2014). Turnover was up 51% y-y to RM157 million in 2QFY18, lifted by improved sales in both the trading and manufacturing arms. Progressive works for the RAPID project supported demand for the trading unit. As mentioned before, Pantech expects sales to the massive project in the current financial year to exceed that in FY17. Trading sales were up 30% y-y to RM84 million, accounting for some 54% of total sales. Its manufacturing arm also reported stronger demand with sales rising 86% y-y to RM73 million. About 80% of its carbon steel products and 40% of the stainless steel products are exported. Overseas demand is led by sales to US shale producers. The carbon steel plant is already at full capacity while utilisation at the stainless steel plant is up to 90% capacity. Orders in hand now run up to year-end. Meanwhile, ramping up of production for its new galvanizing plant is progressing as scheduled. The plant is still loss-making currently but Pantech expects it to breakeven by the end of this year. This should be reflected in improved 2HFY18 earnings. 2

3 Net profit was up 129% y-y to RM11.8 million in 2QFY18. This brings earnings at the half-year mark to RM25.7 million, well ahead of the RM13.2 million in 1HFY17. Earnings Outlook Demand outlook for Pantech remains upbeat on the back of stable crude oil prices. We are keeping our earnings forecast unchanged. Brent crude futures prices have been trending steadily higher in the past few months, after hitting a year-low of around US$45 per barrel in June. Currently the futures contracts are hovering around US$58 per barrel. The more bullish outlook is underpinned by better demand and supply data. Production cutback by OPEC, by 1.8 million barrels per day (mbpd), is keeping a lid on supply while the strengthening global economy is lifting demand. Output growth from US shale also appears to be slowing after the sharp ramp up in 2H16-1H17. As a result, the global glut in oil has been pared back some suggesting that the market is starting to rebalance. To be sure, we doubt oil prices will see significant gains from hereon. OPEC s cutback agreement was previously extended to March That leaves a huge question mark on what will happen if the deal is allowed to expire next year. Furthermore, US shale production is still expected to grow. According to the Energy Information Administration (EIA), US crude oil output in 2018 is forecast to reach an average of 9.84 mbpd, from estimated 9.25 mbpd in Plus, the US is not the only country pursuing shale oil and gas production given the rapid advancement in the technology. For instance, it is now feasible to extract oil and gas from previously prohibitive terrain. Nevertheless, stabilization of crude oil prices within a range of say US$45-55 per barrel is positive as it allows oil companies to better budget and execute their plans. New projects (including some delayed ones) will have to be undertaken to replenish depleting fields. Currently, about half of Pantech s manufacturing output is exported. The US is its single largest market. Other key markets include the Middle East and Indonesia. Pantech is also looking to penetrate the European market for its stainless steel products. The carbon steel plant is running at capacity while the stainless steel plant is at a high 90%. The company intends to progressively add equipment and workers to meet rising demand. Meanwhile, domestic demand will still be driven by the RAPID project in the medium term. We expect Pantech s trading contributions will continue to account for the bigger slice of total sales, currently at over 60%. 3

4 The newly commissioned galvanizing plant too caters mainly to the domestic market. Ramping up in production has been progressing well. The plant is expected to break-even by end-2017 and will contribute positively in to its FY19 results. Meanwhile, more robust global prices for steel and nickel will help keep selling prices for end products resilient. Recall that Pantech s margins were hurt by stiff competition in previous years. In particular, demand in China has been picking up and that has alleviated pricing pressure from dumping activities. Valuation and Recommendation We are keeping our earnings forecast unchanged as earnings in 1HFY18 were within our expectations. Net profit is estimated at RM49.7 million for FY18 and RM56.1 million for FY19. That implies the stock is trading at relatively modest 10.6 and 9.3 times estimated earnings. It does have some 151 million warrants outstanding (expiring Dec 2020 and 2021 with the exercise price set at 50 sen). On a fully diluted basis, valuations are still decent at 12.2 and 10.8 times earnings for FY18-FY19. We also expect the company to generate positive free cashflow. Pantech has maintained dividends through the worst of the oil & gas downturn. Dividends totaled 1.8 sen per share or about 37% of profits in FY17. For 1HFY18, dividends totaled 1.5 sen per share, including the most recent 0.5 sen per share 2 nd interim dividend. Assuming a 40% payout for the full-year, dividends should total some sen per share for FY18-FY19. This will give shareholders a higher than market average net yields of about % at the prevailing share price. The company s balance sheet remains healthy. Gearing stood at 21% at end-2qfy18. Based on our earnings forecast and assumed dividends, we expect the company s gearing to lower to roughly 15% by end-fy18. We are keeping our BUY recommendation on the stock. 4

5 Profit & Loss Analysis Yr-end Feb (RM mil) E 2019E Turnover EBITDA Depreciation Interest inc/(exp) (8.0) (4.8) (5.1) (5.2) Extraordinary loss/(gain) - (0.5) - - Pre-tax profit Tax Minorities (0.0) (1.3) - - Net profit Operating margin (%) Pre-tax margin (%) Net margin (%) Effective tax rate (%) Per Share Data Yr-end Feb E 2019E EPS (sen) P/E (x) FD EPS (sen) FD P/E (x) Net dividend (sen) Net yield (%) NTA/share (RM) Price/NTA (x) Cashflow/share (RM) Price/cashflow (x) Gearing (%) ROE (%)

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