52-week price range (RM) 0.517-1.04
Upbeat outlook on domestic and export demand
Securing more contracts from oil majors
Expect strong double-digit growth in FY14-FY15
Forward P/E of only 8.5x with net yield of 5.5%
Recent Development and Outlook
Investor interest in Pantech Group Holdings has been growing in recent months – and this is reflected in its rising share price. We attribute this to upbeat outlook for the company and the stock’s attractive valuations – relative to the broader market, the oil and gas sector as well as the company’s own prospective growth.
Pantech is seeing increasing demand for its pipes, fittings and flow control (PFF) products, from both the domestic and export markets.
Domestic sales regain traction after general election
Domestic demand is picking up speed again with the resumption of contracts flow now that the general election is over.
The oil and gas sector is one of the key focus areas under the government’s Economic Transformation Programme. This sector is also Pantech’s single largest customer group, accounting for some three quarters of the company’s total sales. The remaining demand is attributed, primarily, to the oil palm industry and downstream refining, the power sector and others.
National oil company, Petroliam Nasional intends to spend some RM300 billion over a five-year period, to develop new projects, including new deepwater and marginal oil fields, as well as undertake enhanced oil recovery from existing oil fields. Spending will filter down to the downstream support services and equipment industries, including the PFF products sold by Pantech.
With an extensive range of over 22,000 product items of various sizes, grades, types, categories and brand names, Pantech provides its customers a reputable and reliable one-stop solution.
Increasing overseas sales to oil majors
Whilst the domestic-oriented trading business still accounts for the larger slice of total sales – about 60% in the latest financial year ending February 2013, the manufacturing arm is registering comparatively stronger growth. Manufacturing sales doubled in FY13 to RM253 million, from RM126 million in the previous financial year, compared with the 24% y-y growth for the trading arm. Total sales grew 46% to RM637 million in FY13.
Growth for the manufacturing arm is expected to continue to outpace that for the trading business. Pantech foresees that it will eventually contribute about 60% to the company’s total sales.
Export demand is robust, in the US, Latin America and even Europe, on the back of continued spending by oil majors.
Crude oil prices have been holding steady over the past 2-3 years – the Brent crude averaged some US$111-112 per barrel in 2011-2012, respectively, and about US$108 per barrel in 1H13 – having recovered smartly from the slump in the immediate aftermath of the global financial crisis. At current level, prices are supportive of exploration and production activities.
Sales for Pantech have been further boosted following the acquisition of UKbased, Nautic Steels in March 2012. Nautic Steels specializes in niche market PFF, including high value copper nickel, duplex and super duplex stainless steel and other alloy products.
These products are widely used in highly corrosive, acidic, salt saturated water and high temperature environments such as marine oil industry and water desalination plants. Importantly, Nautic Steels’ products are approved by oil majors such as Aramco, Petrobras, Qatar Petroleum, BP and Shell. The acquisition complements Pantech’s local manufacturing operations and product range and has bolstered the company’s ability to secure new contracts and widen its market reach. Just this week, Pantech announced a contract to supply locally manufactured long bends to Indonesia’s national oil company, Pertamina.
Anti-dumping suit negatively impact stainless steel plant
On a less positive note, a recent anti-dumping suit filed against Malaysia, Vietnam and Thailand will affect sales for Pantech’s stainless steel pipes in the US. The ban will come into effect in October.
Currently, the company sells about 300 tonnes of stainless steel pipes to US customers monthly, about 30% of production capacity at the new plant in Johor.
To mitigate the impact, Pantech is planning to triple production of stainless steel fittings (not affected by the ban) and is confident of securing alternative markets for at least half of the current US pipes sales.
The setback will likely affect short-term profitability at the new plant, which is just turning around. The plant was loss-making in FY12-FY13, while it was ramping up production, but had broken even in 4QFY13.
Nevertheless, we do not expect a material impact on Pantech’s overall bottomline. We are not changing our earnings forecast.
In addition to the above-mentioned measures to counter the anti-dumping suit, the recent strengthening of the greenback will also help partially offset the negative impact. Exports sales are typically denominated in US dollar and a stronger greenback translates into higher ringgit sales.
Expanding capacity at Nautic Steels
Demand for Nautic Steels’ products has been gaining in strength since Pantech’s takeover and the unit is expected to be one of the key drivers for growth going forward.
The company is finalizing the purchase of second plot of land near the existing factory, which would give it extra space for additional equipment and warehouse storage.
Pantech has been re-jigging Nautic Steels’ production processes, product mix and is building up inventory to improve cost efficiency and support rising global demand.
On the lookout for future acquisitions
The company is on the lookout for opportunities to further widen its market and operations. This could take the form of acquisitions in the veins of the Nautic Steels takeover or joint ventures to supply semi-finished locally manufactured PFF products to overseas partners.
There are currently no plans for any major expansion on the home front. The carbon steel manufacturing plant has been running at full capacity for some time. No major capacity expansion is planned although it did recently add some new machineries to up the production of high frequency induction long bends. To further improve sales and profits, Pantech will continue to re-jig the product mix and extend production hours. The carbon steel plant is running on two shifts.
Meanwhile, the stainless steel plant is currently running on a single shift. Therefore, it could easily increase production without incurring fresh capex. New equipment could also be added when demand warrants it, as there is still ample space in the facility.
Valuation and Recommendation
Pantech remains on track to hit its sales target of RM1 billion by FY16. Sales grew at a compounded annual rate of 16.6% in the past three years, from RM402 in FY10 to RM637 million in FY13.
We expect Pantech to maintain a double-digit pace of growth for the next three years.
Sales are estimated to rise to RM738 million and RM855 million in FY14- FY15, respectively, while net profit is forecasted to expand to RM63.6 million and RM73.5 million for the two years. Net profit stood at RM55 million in FY13.
Despite its recent share price gains, Pantech is still trading at attractive valuations – at P/E multiples of only 8.5 and 7.3 times our estimated earnings for FY14-FY15, respectively.
Its valuations compare favourably against that for oil and gas stocks listed on the local bourse – where most are trading between 15-25 times forward earnings multiples – and the broader market’s average valuations of about 16 times. Its valuations are also low relative to the company’s double-digit growth prospects.
The company has some 74.8 million warrants outstanding – with exercise price of 60 sen and expiry in December 2020. Even on a fully diluted basis, the stock is still attractively valued at roughly 10 and 8.7 times FY14-FY15, respectively.
With no major capex in the plans – barring any new acquisitions – we expect gearing to decline over the next three years. Gearing stood at 47% at end- FY13.
Coupled with stronger earnings and cashflow, this means Pantech has room to up dividends.
The company paid dividends totaling 4.6 sen per share in FY13, which is equivalent to a 45% profit payout ratio, up from 3.5 sen in FY12. Assuming a similar ratio, we estimate dividends to total 5.5 sen for the current financial year ending February 2014 and 6.5 sen per share for FY15. This will earn shareholders higher than market average net yields of 5.5- 6.5% at the prevailing price for the two years.
In short, we are sanguine that the stock will continue to do well on the back of the gradual crystallization of its earnings growth potential. We maintain our BUY recommendation.
Publish date: 12/07/13