Period  3Q14/9M14

Actual vs. Expectations Pantech Group Holdings Bhd (PANTECH)’s 3Q14 net profit of RM12.1m brought 9M14 net profit to RM41.1m which is below expectations, at 62.2% of our (RM66.1m) and 62.8% of the consensus (RM65.4m) full-year estimates, respectively.

 The variance to our expectations is due to the lower-than-expected margins from the trading division on slower project execution, which affected the trading division’s revenue and less optimal product mix.

Dividends  A NDPS of 1.0 sen was declared, bringing the 9M14 NDPS to 3.4 sen. This only accounted for 64.2% of our full-year NDPS expectation of 5.3 sen.

Key Results Highlights QoQ, 3Q14 net profit was lower by 21.2%, at RM12.1m, compared to RM15.3m in 2Q14, mainly due to a drop in the revenue in the manufacturing divisions which suffered from lower exports. Having said that, the division turned in better margins as the stainless steel division was not suffering from losses anymore.

 YoY, net profit declined 22.6% from RM15.6m in 3Q13 as trading revenue contracted significantly by 23.6% on the back of weaker demand from oil and gas sector with slower project execution (fabrication and downstream contracts seem to be delayed thus far).

Outlook  Management guides that the next two quarters could be quiet for the trading division given that the fabrication and downstream oil and gas projects in Malaysia are still sluggish. PANTECH envisages better fortune from 2Q15 onwards, which would coincide with our view that fabrication contracts will likely only materialize from 2QCY14 onwards.

 Management guides that it is still contesting the US anti-dumping suit in its stainless steel division. A resolution is expected by July-14. As mentioned previously, PANTECH’s alternative strategy is to shift production to higher-end stainless steel fittings production (which is not subject to such anti-dumping laws and have higher margins than stainless steel pipes); and is actively exploring other potential export markets such as South America and Europe.

 Management does not rule out any further M&As as growth catalysts.

Change to Forecasts Given the upcoming weakness, we are cutting the trading division’s FY14 revenue growth to 2% (from 15% previously) and 10% in FY15 (from 15% previously). The better growth in FY15 is based on expectations that activities will pick up by 2HCY14.

 The cuts resulted in overall Group net profit being reduced by 12.8% and 17.4% for FY14 and FY15 to RM57.7m and RM61.9m, respectively (from RM66.1m and RM75.0m).

Rating Maintain OUTPERFORM

Valuation  The cuts reduce our target price to RM1.07 (from RM1.28) based on unchanged CY14 target PER of 12x.

 Given that there is still a total return of 14.8% (9.7% from share price appreciation and 5.1% dividend yield) we still maintain our OUTPERFORM call.

 Our current target PER is close to the +2.0 standard deviation level of 11.7x. We had valued PANTECH on such levels as we believe its earnings prospects have entered a new phase after it gained access into new markets (Pertamina and UK) via Nautic Steels.

Risks to Our Call i) Significant sluggish project execution in the oil and gas sector projects; and (ii) significant swings in raw material costs could lead to lower operating margins.

Source: Kenanga