Written by InsiderAsia
Monday, 26 August 2013 11:24
Increased speculations on the timing of the US Federal Reserve pulling back on its bond purchase programme buffeted emerging capital markets in recent days. The reversal of capital flow — on expectations of a stronger US economy and rising long dated government bond yields — sent bond and stock markets as well as currencies for many emerging countries lower.
The ringgit fell well out of its trading range — of between 3 and 3.2 to the US dollar — for the first time since mid-2010. At its worst, the local currency traded above 3.33 against the greenback — compared with its recent high of 2.93 in mid-May.
Given the confluence of factors such as slower growth, high fiscal deficit, narrowing current account surplus and high foreign ownership of government bonds, the ringgit could remain under pressure in the near to medium term.
Exports translate into higher ringgit sales
Pantech Group is among the beneficiaries of a weaker ringgit. The bulk of its manufacturing sales — which accounted for just over half of total sales — is export-oriented and denominated in US dollar. The company sells its carbon and stainless steel pipes, fittings and flow control (PFF) products worldwide, including to the US, Europe, the Middle East and Asia.
In addition, the company’s UK-based manufacturing outfit, Nautic Steels, is doing very well, and is one of the key growth drivers going forward. Pantech just completed the purchase of a second plot of land near its existing facility. The new equipment is set for commissioning within the next month or two. With the additional capacity and space, it will be able to widen product range and build inventory to support a sales base estimated to double current levels. A weaker ringgit against the British pound also translates into higher ringgit sales.
Good demand for manufacturing arm
Demand from the oil and gas sector is still quite robust. Prevailing oil prices — the benchmark Brent crude is currently hovering around US$110 (RM330) per barrel — remain supportive of exploration and production activities. To be sure, competition is intense. But Pantech is holding its own.
The higher value niche products manufactured at Nautic Steels are approved by most of the world’s oil majors. Locally, the carbon manufacturing plant is running at full capacity. Pantech is able to maintain margins — despite a competitive environment — on the back of better product mix, including more orders for higher margin long bends, and lower raw material costs.
On the other hand, the expected turnaround at the stainless steel plant suffered a setback earlier, when stainless steel pipes from Malaysia, Thailand and Vietnam were slapped with anti-dumping duties in the US. Pantech expects to make its last shipment to US customers by end-August. It intends to fight the decision in court, likely by March-April 2014.
In the meantime, the company is planning to take up half of the spared capacity to up production of stainless steel fittings. The stainless steel plant made a loss in the 2013 financial year (FY13) and a small profit in the first quarter (1Q) of FY14. The stainless steel plant is expected to stay in the black, albeit marginally so, for the rest of the year on the back of this latest development — we had originally forecasted stronger earnings contribution from this plant.
Elsewhere, outlook for the trading division is also turning out to be on the weaker side. Sales fell 12% year-on-year in 1QFY14 (March to May), muted by uncertainties in the run-up to the general election. However, the expected pick-up in momentum post-election has yet to materialise — although this could improve in the later part of the year. Capital spending in the local oil and gas sector is still expected to be strong.
Still good value at 8.8 times FY14 earnings
Taking into account all the above-mentioned factors, we are keeping our earnings forecast broadly unchanged. Pantech reported a net profit of RM13.8 million in 1QFY14, up 10.4% y-o-y. We estimate earnings will improve from this level in the current quarter ending August.
FY14 net profit is estimated to total some RM63 million — up 15% from RM55 million in FY13. Looking ahead, we expect net profit to continue to expand at a double-digit pace in FY15 and FY16.
At the current share price of RM1, Pantech shares are trading at only 8.8 and 7.7 times our estimated earnings for FY14 and FY15, respectively — still very attractive relative to the average valuations for oil and gas stocks, the broader market and its own prospective growth.
Unlike many growth-oriented companies, Pantech also offers pretty attractive yields. The company paid dividends totalling 4.6 sen per share in FY13. With lower capital expenditure planned for the next two years — barring any new acquisitions — strengthening cashflow and gearing at only 35%, we expect the company to maintain a high payout ratio.
Assuming a 45% profit payout — the average ratio for the past three financial years — dividends will total 5.1 sen and 5.9 sen per share in FY14 and FY15, respectively. That will earn shareholders higher-than-market average net yields of 5.1% and 5.9% at the prevailing price for the two years.
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.
This article first appeared in The Edge Financial Daily, on August 26, 2013.
Publish date: 26/08/13