Rapid boost bright­ens Pan­tech’s out­look

Com­pany seen get­ting big jump in profit in fi­nan­cial year 2018

The Star Malaysia - StarBiz - - Companies & Strategies - By DANIEL KHOO danielkhoo@thes­tar.com.my

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.

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