Tags: InsiderAsia | Pantech
Written by InsiderAsia
Thursday, 15 October 2009 16:50
WE are upbeat on Pantech's (RM1) prospects going forward. The company has built a strong business franchise, reputation and track record as one of the largest one-stop centres for PFF (pipes, fittings and flow control products) solutions in the country.
In addition to a strong hold on the domestic market, Pantech has also made inroads overseas with its range of manufactured carbon steel fittings. Its customised long bends, in particular, have enjoyed good demand abroad including in the US, Asia and the Middle East.
Pantech maintains good profitability
Demand for PFF has demonstrated resilience over the past few quarters amid uncertainties in the global economy. And despite the sharp plunge in prices for steel products, Pantech is still running a very profitable business. This is underscored by its earnings results for the first half (1H) of the financial year ending February 2010.
Sales were up by about 2% year-on-year (y-o-y), totalling RM243.3 million, in 1HFY10. Even though net profit dropped 16% y-o-y to RM28.3 million, the results were admirable given the sharp drop in prices for steel products since hitting peak levels in mid-2008. To be sure, Pantech is no longer earning "abnormal" margins/profits due to record prices. But the underlying fundamentals of the business remain very much intact.
Sales for the manufacturing arm, the bulk of which were for export, fell sharply in 1HFY10 as a result of the global downturn. Demand in the US, one of its biggest markets, in particular was weak.
Positively, strong demand in the local market picked up the slack. The company's trading arm remains its biggest earnings generator, servicing, primarily, the domestic oil and gas sector as well as palm oil and refinery, petrochemical and oleo-chemicals industries.
The oil and gas sector is estimated to account for about 70% of Pantech's sales and will be the key driver for growth going forward.
Still very much a growing company
The company is in the process of acquiring a piece of land totaling some 20 acres in the Pasir Gudang Industrial Area, Johor, for RM12.85 million. The land will be used for its new corporate office and warehouse, which will consolidate its southern region warehouse, office and supply chain.
Also on the drawing board are plans to build a new factory — to expand its current range of manufactured PFF products. Total capex for the buildings is estimated at RM50 million.
In addition to expanding its product range, Pantech is focused on tapping new export markets. Most recently, Pantech gained approval from the EU Commission to sell its products in the euro zone without attracting the hefty anti-dumping duties currently levied on many countries, including Malaysia.
It has already made promising inroads. The euro zone market, which is relatively protected, offers vast potential. At the same time, Pantech is working hard to further penetrate the Middle East markets, including oil-rich Saudi Arabia.
If all goes to plan, sales to these new markets will boost utilisation at the company's existing manufacturing plant, for a start. Utilisation has fallen to about 55% currently, due to weak global demand, especially in the US. Success will also diversify the company's geographical risks going forward.
Another of the company's main strategies is to move towards higher-value products, such as corrosion resistant PFF for the subsea segment of the oil and gas industry.
Low valuations offer upside gains
Pantech's shares are very attractively valued against our estimated growth for the company as well as the broader market's average valuations. This promises good capital gains potential as the stock is gradually rerated upwards.
The stock is now trading at only 6.7 times our estimated earnings of 15 sen per share for FY10. Earnings are forecast to grow a further 18% to RM66.5 million in FY11, underpinned by the global economic recovery.
Thus, Pantech's prevailing valuations compare favourably to its prospective growth rates as well as the average valuations for oil and gas stocks (estimated at about 10-12 times price-to-earnings or P/E) and the broader market (about 17-18 times P/E).
Pantech also pays higher-than-market average yields. Based on estimated dividends totalling three sen per share for the current financial year, shareholders will earn a fairly attractive net yield of 3%. Dividends are expected to grow further in line with Pantech's earnings expansion going forward.
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.
http://www.theedgemalaysia.com/business-news/151411-pantech-strong-growth-prospects-on-cheap-valuations.html
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