Pantech Group Holdings Bhd
(Jan 23, RM0.745)
Downgrade to underperform from outperform with a lower target price (TP) of 72 sen from 86 sen: Pantech reported third quarter financial year 2015 (3QFY15) core net earnings of RM9.1 million which brought nine-month (9MFY15) net profit to RM36.1 million. 

This was below our (RM60.3 million), and consensus’ (RM56.6 million), full-year expectations, at 59.9% and 63.8%, respectively. 

The major deviation of earnings resulted from lower than expected manufacturing revenue and overall group earnings before interest and tax (Ebit) margin achieved in 3QFY15.

A third interim net dividend per share (NDPS) of 0.6 sen was declared in 3Q15, bringing 9MFY15 NDPS to 2.6 sen. This is below our expectations at 65% of our full-year NDPS estimate of 4 sen.

In 3QFY15, Pantech’s core net profit declined 32.2% quarter-on-quarter (q-o-q) largely due to a 23.3% drop in trading revenue, which stemmed from slower demand from the oil and gas sector and competitive pricing environment in the industry.  Ebit margin from the trading division, as a result, shed 670 basis points from 14.2% to 7.5%.

On a year-on-year (y-o-y), core net profit plunged by 24.9% also due to weaker trading revenue a decline of 12.4%) albeit being slightly offset by a 4.1% y-o-y gain in manufacturing revenue, driven by stronger performance in stainless steel fitting manufacturing division.

In 9MFY15, net profit fell by 12.4% y-o-y largely due to weakness in the manufacturing division caused by lower export sales of stainless steel pipes to the Middle East, Europe and United States.

Revenue fell by 21.3% whilst Ebit fell by 14.6%.

While the Refinery and Petrochemicals Integrated Development (Rapid) project is expected to contribute positively to the group in the coming years, we believe the near-term outlook could be sluggish due to the challenging oil and gas industry amid uncertainty in crude oil prices.

Meanwhile, the export market for the manufacturing division is expected to be challenging in the near term as Europe struggles with tepid gross domestic product (GDP) coupled with the loss of some US export sales due to anti-dumping policies previously.

Due to the bleaker oil and gas industry outlook, we cut our FY15 and FY16 core earnings forecasts by 23.4% and 23.2%, respectively.  This is after we have reduced our FY15 or FY16 revenue growth forecast for trading to 0% and 5% respectively (from 10% previously).  We have also reduced our FY15 and FY16 carbon steel capacity utilisation assumption to 75% and 85%, respectively (from 100% previously). 

We have also reduced our dividend per share forecast to 3.3 sen and 3.9 sen respectively for FY15 and FY16 estimates in view of weaker near-term earnings outlook.

Post our earnings cuts, we reduced our TP based on an unchanged nine times calendar year 2015 price to earnings ratio on a fully diluted basis. — Kenanga Investment Bank Bhd, Jan 23

This article first appeared in The Edge Financial Daily, on January 26, 2015.