PANTECH GROUP HOLDINGS BHD

By Kenanga Research Outperform Target price: 75 sen

PANTECH’S earnings in the past two quarters have been boosted by increasing demand from domestic projects, especially the Refinery and Petrochemical Integrated Development (Rapid) project in Pengerang.

Year-to-date, Kenanga said Pantech had received RM80mil-RM90mil in orders from Rapid (compared with full-year orders of RM100mil in 2017).

“Moving forward, we expect the demand for pipes, valves and fittings to be robust as the project is entering the infrastructure development and buildings phase along with the gradual completion of groundwork.

“We understand that part of the orders are variation orders from sub-contractors, which usually fetch higher margins due to higher urgency. Thus, we reckon trading earnings before interest and tax margins will improve in 2018 from 10.5% a year ago.”

Besides stronger domestic sales, Kenanga said the manufacturing arm is also targeting better earnings contribution in view of higher sales orders from overseas.

“Note that 31% of its 2017 top-line is generated from export markets dominated by the US, Indonesia and the Middle East and such demand, in our view, are sustainable on the back of robust activities from shale producers in US, as well as revival and continuous maintenance work from the oil and gas downstream segment in Middle East and Indonesia.

“While both its stainless steel and carbon steel plants are currently operating at 90% utilisation, we expect these two plants to continue operating at optimal utilisation of at least 85% in either 2018 or 2019.”

With no changes in its estimates, Kenanga is maintaining its “outperform” call on the stock, with an unchanged target price of 75 sen pegged to higher price-to-book value (PBV) of one-time 2019’s PBV (from 0.9-times previously) on a fully diluted share base, including in-the-money warrants.