Pantech Group Holdings Bhd
(Oct 19, 56.5 sen)
Downgrade to underperform with a lower target price of 50 sen: The results for the first half ended Aug 31, 2016 came in below expectations with core net earnings of RM13.2 million, accounting for only 31% and 32% of our and market consensus full-year estimates, respectively. The deviation was mainly due to lower-than-expected sales of pipes, valves and fittings (PVF) and weaker trading margins. A second interim net dividend per share of 0.5 sen was declared in the first quarter ended May 31, 2016 (1QFY17), which was also below our expectations due to the weaker earnings.

Pantech’s 2QFY17 core net profit fell 37% quarter-on-quarter to RM5.1 million, no thanks to a 16% drop in revenue from both the trading and manufacturing segments as well as weaker margins. Year-on-year, 2QFY17 core earnings plunged 51% largely attributable to lower manufacturing output as a result of weaker global demand. Overall, earnings before interest and tax (Ebit) margin weakened to 7.5% from 13.2% in 2QFY16 arising from weaker operating margins from both segments. Cumulatively, its earnings for the first half ended Aug 31, 2016 tanked 32% as a result of the above-mentioned reasons.

Despite weaker earnings, Pantech is on track to meet its target of RM100 million worth of orders from Pengerang site development with the year-to-date orders of about RM80 million. We expect the PVF demand from the refinery and petrochemical integrated development project to anchor the company’s earnings despite weakening margins amid slower global demand. Meanwhile, its UK manufacturing division (Nautic Steels) is still staying at break-even level this year as offshore activities remain muted.

We cut our FY17 to FY18 earnings forecasts by 28% to 30% after adjusting for lower sales from both trading and manufacturing by 10% and 9%. Post-earnings adjustment, we decided to switch our valuation model to price-to-book value from price-earnings ratio due to the significant deterioration in near-term earnings prospect. This is also consistent with our sector valuation metric during challenging times.  — Kenanga Research, Oct 19