Rapid boost brightens Pantech’s outlook
Company seen getting big jump in profit in financial year 2018
LOW profile steel pipe and valve maker Pantech Group Holdings Bhd is riding on a pick-up in oil and gas projects at the Refinery and Petrochemical Integrated Development (Rapid) project.
Its share price has started to trend up more than four months ago, closing at 69 sen yesterday. The stock had been range-bound at the 50 sen level for more than a year prior to that.
The company had experienced a steady decline in both its revenue and net profit numbers since FY13.
However some research houses are turning more positive on Pantech’s prospects.
If forecasts by Kenanga Research come true, which is for Pantech’s net profit to rise to RM47.2mil in FY18 from RM29.7 in the previous year, then the company would see its net profit spike by around 60% for the first time after many years of declining profits.
Profits had declined by almost 10% per year on average over the past five financial years since FY13 from RM56.06mil to RM29.72mil in FY17 while revenue in FY17 stood at RM479.35mil, declining from RM635.66mil in FY13.
Pantech reported a net profit of RM25.72mil for the cumulative six months until Aug 31 and this means it has already met 86.5% of FY17’s net profit figure.
Commenting on its results for the first half period of FY18, Kenanga notes that Pantech’s results came within expectations with core net earnings of RM25.7mil at 54%/56% of its and the market’s consensus full-year estimates.
Pantech says in its financial report that performance was mainly due to the increase in sales from both its trading and manufacturing divisions from the increased deliveries to the Rapid project and overseas markets.
Its trading division had seen net profit almost tripling from RM3.94mil in the second quarter last year to RM10.96mil in the second quarter this year due to the increase in sales demand and delivery in downstream oil and gas projects, namely from the Rapid project.
“The higher sales contribution as well as the better product mix has also contributed to the higher segment pretax profits for the current quarter and the six months ended Aug 31, 2017,” the company says.
Its manufacturing division saw net profit rising to RM4.88mil from RM3.81mil yearon-year (y-o-y).
The rise in performance on a y-o-y basis is notable but Kenanga notes that its performance for its most recent second quarter actually fell compared to the first quarter, that is on a quarter-on-quarter (q-o-q) basis.
“Despite revenue growing marginally by 4%, second quarter core net profit declined by 16% q-o-q to RM11.8mil no thanks to weaker earnings contribution from both manufacturing (-11%) and trading (-16%) segments,” the research house says.
“Besides this, the overall earnings before interest and taxes margin deteriorated to 17% in the second quarter of FY18 from 19.4% in the first quarter as a result of poorer product mix,” Kenanga adds.
The research house notes that performance in the y-o-y basis had improved tremendously also following the stabilisation in oil prices in the bigger picture.
In its notes to its latest accounts, Pantech said: “The group remains cautiously optimistic on the increased activities and development in oil and gas industries with the current oil price above US$50 per barrel. The group will expand its capacity as the major pipes, valves and fittings solutions provider to the oil and gas industries, related upstream and down-stream industries.”
Pantech notes that the increased interest in shale gas in the US has spurred increases in sales for its manufacturing division.
It is also benefitting from the Rapid project which is expected to be completed in 2019 and expects to meet the orders from these projects.
While its share price had risen from the depths following the downturn in the oil and gas industry, Kenanga Research still keeps its earning estimates for the company unchanged and maintained its “outperform” call on the stock with an unchanged target price of 75 sen with a higher price to book value of one times of FY19’s forecast.
“Our target price has an implied FY19’s estimated price to earnings ratio (PER) of 13.1 times, which is close to its five-year average mean of 12.8 times,” the research house says.
Perhaps the additional boost in its earnings will come in quite soon after its new galvanising plant breaks even, possibly in the second half of FY18 according to DBS Group Research.
This will expand Pantech’s profit margins even further, despite the absence of other expansion plans. With the continued recovery in the oil and gas and steel sectors, Pantech’s valuation may soon fetch a higher premium from the 11.54 PER at present given its proxy to the Rapid project.
Oil and gas hub: An oil pipeline at the Rapid site in Pengerang, Johor. Pantech has reported higher sales from both its trading and manufacturing divisions due to the Rapid project.