Pantech: Still in the early phases of growth

Pantech: Still in the early phases of growth

Tags: InsiderAsia Pantech Group

Written by InsiderAsia
Tuesday, 04 August 2009 18:10



THE latest earnings results for Pantech Group (90.5 sen) for the first quarter (1Q) of its financial year (FY) ending February 2010 underlined the relative resilience in the company's business operations. Sales totalled RM123.9 million, down 11% quarter-on-quarter (q-o-q) but were up 9.3% year-on-year (y-o-y).

We expect sales and earnings to contract slightly for the full year, after adjusting for "abnormally high" steel prices, demand and margins in 2008. Sales and net profit are estimated to decline 4% and 10% to roughly RM490.3 million and RM53.8 million, respectively in FY10.

However, we are sanguine on Pantech's growth prospects beyond the current adjustment period. The company is enjoying continued stream of orders from customers and demand should gradually strengthen over the coming months. Sales are forecast to resume growth, by about 15%-17%, in FY11-FY12.

Potentially handsome capital gains
Based on its growth prospects, the stock appears to be trading on very attractive valuations. Pantech's shares are priced at only 5.9 and 5.0 times our estimated earnings for FY10-FY11, respectively.

Besides compelling valuations relative to its prospective growth rates, its shares are also trading well below the average price-to-earnings (P/E) for the oil & gas industry — estimated at about 10 times — as well as the broader market, which is currently priced above 15 times forward earnings.

In addition to potentially handsome capital gains, Pantech also rewards shareholders with fairly decent yields. Dividends are estimated to total 2.5 sen per share for the current financial year, which translate into a net yield of 2.9%.

Resilient local demand from oil & gas

As mentioned above, the company's sales held up fairly well in 1QFY10 despite the global downturn.

Sales under the trading arm, which caters primarily to the domestic oil & gas market, remain robust. The manufacturing arm, mainly for exports, did register some slowdown. We believe this was due, primarily, to customers drawing down on stocks. Demand should start to recover over the course of the next few months.

In fact, Pantech has also been unwinding some of its own inventory. Stocks were lower at RM174.9 million at end-May 2009, down from RM202.7 million at end-February. As a result, the company's gearing improved to 55% compared to 64% over the same period.

Oil prices unlikely to revisit lows

Crude oil prices have rebounded from the December 2008 lows of around US$35 (RM122.85) per barrel — rallying as high as US$73 per barrel in June. Although oil has since given back some of its recent gains on the back of growing concerns over the pace of the global economic recovery, we doubt prices will fall back to previous lows.

Market consensus suggests crude oil will trade between US$50 and US$70 per barrel in the near to medium term — and likely to head higher going forward as the global economic recovery gains traction. The long-term outlook for oil remains unequivocally bullish.

Currently, crude oil is hovering around US$70 per barrel — above the breakeven levels for most projects, including deepwater projects. Hence, we should see strong support for continued exploration and production activities in the sector.

Solid order book of around RM150 million

Indeed, Pantech continues to receive good flow of orders. The company typically maintains a running order book of around RM150 million, which will keep it busy for at least the next three months.

Pantech to pursue growth

Pantech's sales grew at an average compounded rate of 57% per annum over the past five year. We are confident that it will continue to grow at a double-digit pace in the foreseeable future.

The company has a wide clientele base as the largest one-stop centre for PFF (pipes, fittings and flow control products) solutions in the country. It carries in excess of 20,000 inventory items, thus providing customers timely and comprehensive solution for the transmission of all fluids and gases. Each and every one of the company's products carries proper certification, to meet the high benchmark standards for safety and quality required of the oil & gas industry.

Repeat orders for regular maintenance undertaken by its existing customers provide a steady stream of business and account for up to 40% of Pantech's annual sales.

Expanding product range and customer base

To further boost growth, the company is pursuing new markets and expanding its product range. It is an active participant in oil & gas exhibitions — local and overseas — to raise the company's profile and tap new markets.

It recently acquired two pieces of land — adjacent to its current manufacturing facility in Selangor and office in Johor — for future expansion purposes. In particular, Pantech intends to focus on niche market segments for customised products that carry higher profit margins.

In a positive development, Pantech has just won approval from the European Union (EU) commission to sell its products in the eurozone without attracting the hefty anti-dumping duties currently levied on many countries, including Malaysia. This exemption will give the company an upper hand in further widening its export markets and customer base.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.