As Pantech’s share price has rallied strongly, we took the opportunity to take a relook at the company’s numbers. We continue to like Pantech’s profitable business segments and believe the company will continue to strengthen. Its projected dividend yield still remains attractive at 3.6%-4.0%. Maintain BUY, with our FV revised upward to MYR1.43, based on 13x FY14f EPS, assuming full conversion of its ICULS

¨      Company and stock price both performing well. Pantech reported strong results for FY13, chalking up net earnings of RM55.0m (+59.4% y-o-y). Meanwhile, its share price has been on a steady uptrend since we upgraded the stock to BUY in July 2012. Still, its share price has spiked up by some 13.7% in the last two trading days of last week to MYR0.915, taking the stock closer to our MYR1.00 FV. This has prompted us to take a relook at Pantech.

¨      15% growth y-o-y achievable. We believe that Pantech will continue to experience positive growth and are confident that the company will grow at 15% y-o-y in FY14F, with its: i) trading and carbon steel fittings manufacturing division’s performance remaining solid, (ii) stainless steel division may start to contribute positively, (iii) orders for long bends are picking up, and (iv) there are plans to further expand it subsidiary Nautic Steel. That being said, we do not discount possibility of the company embarking on more acquisitions to replicate the success it has had with Nautic Steel.

¨      Pantech undervalued. Based on a conservativescenario analysis based on full conversion of the company’s ICULS and warrants and pegging the stock to a 13x PE vs the O&G industry’s 15x, fair value would be diluted to MYR1.27, which still offers investors a decent 38.8% upside from its last closing price.

¨      Maintain BUY, lifting FV to MYR1.43. We favour Pantech on the belief that the company has good potential. We are revising higher our FV to MYR1.43 from MYR1.00, based on a 13x FY14F PE, at a 13% discount on the O&G industry average PE and assuming that all ICULS are converted. Maintain BUY.

Key Highlights

Stark difference compared to FY13. Currently, all of Pantech’s business segments are contributing positively to the Group. Unlike the preceding year when its new stainless steel plant was in the red, the Group’s overall performance was depressed and Management had been cautious on newly-acquired Nautic Steel. A year on, this stainless steel division has broken even. Also, after overcoming Nautic Steel’s learning curve, Management is now ready to expand the UK unit. Given the stable outlook for the company’s trading and carbon steel fitting manufacturing arm, we remain upbeat on Pantech’s growth story for FY14.

Why Pantech is “the chosen one”. Pantech is maintaining its market position as a one-stop pipes, fittings and flow controls (PFFs) solutions provider, keeping roughly five months’ worth if stock at its warehouses. It has always been the company’s strategy to be its clients’ preferred supplier by having enough inventory; hence Pantech is not constrained by factory lead-time.

Local manufacturing division to see more improvement. We expect its local manufacturing carbon steel fittings, stainless steel pipe and fittings manufacturing arms to deliver better results this year, in our opinion. As usual, the carbon steel fittings manufacturing division’s orders remained robust and all lines are running full steam ahead, with the main growth push coming from growing orders at its stainless steel division. We learnt that the company has been aggressively scouting for new orders, especially in the United States and South America, and believe the outcome has been encouraging. Apart from that, orders or its niche product, long bends, are picking up in tandem with heightening demand in local O&G industry. Currently, Pantech is the only manufacturer of long bends in Malaysia.

Nautic Steel could grow bigger. The company’s game changer, Nautic Steel, has the potential to grow further as we understand that Pantech is waiting for the local authorities in UK to approve its application to convert a retail warehouse into a factory. Management expects to obtain approval in June or July this year. We also gather that Pantech has actually shifted a new machine to UK to boost Nautic Steel’s capacity and product range. As such, we expect te UK unit to contribute a fair bit of the group’s bottomline this year.

More M&A possibilities? We do not discount the possibility of Pantech seeking M&As to strengthen its position in the industry. The success of Nautic Steel has proven its management’s sharp eye in identifying small and well-established companies to value add to the group. We believe Pantech will look out for more companies like Nautic, which have the following: (i) an established clients’ network, (ii) has the approval of international oil majors, (iii) manufactures parts that are in the PFFs value chain, and (iv) able to fetch high margins. 

Targeting MYR1.0bn revenue. Pantech has set its sights on achieving MYR1.0bn in revenue by 2015, the group’s FY16. A simple calculation shows that if Pantech were to achieve this, it would have to boost its topline at an annual rate of 15%-17%. We believe that by maintaining its market lead and steadily expanding along the value chain, Pantech is indeed on the right track.

Of scenario analysis and rerating catalysts. To address concerns of a dilution arising from conversion of Pantech’s its Irredeemable Convertible Unsecured Loan Stock (ICULS) and warrants, we ran a scenario analyses on the possible dilution impact. At the same time, we rerate the company by pegging it to the O&G industry average PE as Pantech has vast exposure in the O&G industry (>80% of sales), and is expanding in this segment. Besides, Pantech has established business relationships with some international oil and gas giants such as Petrobras, Saudi Aramco and Petronas which we believe are a big plus for the Group.

Decent dividend payout. As we highlighted earlier, Pantech has been generous in paying good dividends to reward its shareholders. Its dividend payout has been at around 40% in the past three financial years. Based on our conservative assumption of a 30% payout ratio, Pantech is still able to pay a decent yield of 3.6% to 4.0%.

FIVE reasons why we like Pantech. We have always been bullish on Pantech. The FIVE reasons that justify our BUY recommendation on the stock are:

(i)            We believe Pantech is at the early stage of a strong growth cycle; hence this could be a good time to Buy the stock.

(ii)           The O&G sector is booming and O&G counters are being rerated upwards. Pantech might not be 100% O&G company involved in exploration & production (E&P) activities but the intense capex from oil majors would definitely benefit it. Furthermore, Pantech not only has exposure to the local O&G industry, but also involvement in the global O&G industry.

(iii)          Its strong management team has taken Pantech’s new stainless steel division back to breakeven in less than three years. The Nautic Steel investment has proven Management’s deftness in identifying opportunities to increase shareholders’ wealth.

(iv)          Its transformation into a manufacturing company in general will give rise to income stability. Pantech is on track to ramp up its manufacturing contribution to 50% (from currently 40%)

(v)           Unique business model with cheap valuation. Pantech does not have direct comparable peers as its business model is unique and we think its current PE of 8.3x is still relatively cheap. Even if we assume full conversion of its ICULS and warrants (as shown in the scenario analysis above), its stock would be trading at a 9.3x FY14f PE, which is still at a steep discount to the O&G industry average PE of 15x.

Reiterate BUY, FV revised higher to MYR1.43. As we see good potential in Pantech, are lifting our FV to MYR1.43 from MYR1.00, based on a 13x FY14f P/E assuming all ICULS are converted. This offers a 56.3% price upside. Even if we assume that all ICULS and warrants are converted, our FV would be diluted to MYR1.27, which still offers investors a decent 38.8% upside from its last closing price. Hence, we reiterate our BUY recommendation.

Source: RHB