Pantech to benefit from expected lifting of US shipment suspension

This article first appeared in The Edge Financial Daily, on April 26, 2019.
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Pantech Group Holdings Bhd
(April 25, 57 sen)
Maintain outperform with a target price (TP) of 69 sen.
Financial year 2019 (FY19) net profit of RM47.6 million came in above expectations at 106% of our, and 109% of consensus, full-year earnings forecasts, due to better-than-expected operating margins. The company has proposed dividends of one sen per share, bringing its full-year cash dividends for FY19 to 1.5 sen per share (excluding share dividend of one treasury share for every 100 existing shares announced during its third quarter of the financial year 2019 [3QFY19] results) — above our expectations of one sen per share for the full year.

 
FY19 net profit saw a flattish 1% growth, with a 31% drop from its manufacturing segment due to its US shipment suspensions, but mitigated by a 23% growth in its trading segment.

For  the fourth quarter of the financial year 2019 (4QFY19), net profit of RM11.5 million was also flattish year-on-year (y-o-y), despite a 5% drop in revenue, helped by higher margin for its trading segment (14% versus 11%). Sequentially, the quarter posted a mild 3% growth in net profit quarter-on-quarter (q-o-q), in-line with its 2% revenue growth.

The company is still facing a shipment suspension for its carbon steel butt-weld fittings to the US following a preliminary affirmative anti-circumvention determination in July 2018. However, we gathered that the US Department of Commerce (DoC) had concluded their verifications on Pantech in late-February, and hence, we form our base-case assumption that the suspension will be uplifted before the second half of 2020 (2H20). Additionally, the group is also expected to be a beneficiary of increased offshore fabrication works locally, driven by Petroliam Nasional Bhd’s (Petronas) increasing upstream capex, given that it is the only locally-owned pipe supplier under the Petronas Framework Agreement.

Post-results, we raised our earnings for the financial year 2020 (FY20E) core net profit by 6% after slightly increasing our operating margins assumptions, while also introducing FY21E numbers.

The unchanged TP of 69 sen is pegged to 0.9 times price-to-book value (PBV) on FY20E. Our ascribed valuation is close to its average PBV of one time, implying 12-13 times price-to-earnings ratio (also close to average).

All told, we continue to like Pantech on the back of its potential earnings visibility restoration story, underpinned by the uplifting of its US shipment suspension, and sales growth driven by local fabrication projects.

Risks to our call include: i) slower-than-expected trading volumes; ii) lower-than-expected manufacturing utilisation; and iii) delayed positive outcome from the DoC action. — Kenanga Research, April 25