Pantech Group Holdings Bhd
(Jan 16, 49.5 sen)
Maintain buy with an unchanged target price (TP) of 57 sen: Pantech Group Holdings Bhd’s nine-month period for financial year ended Nov 30, 2019 (9MFY20) core net profit of RM28.2 million (down 20% year-to-date [YTD]) was within our expectations but below consensus estimates, accounting for 73% and 60% of full-year forecasts respectively.

Quarter-on-quarter core profit surged 46% following a normalisation of production costs for US carbon steel (CS) exports. Recall that initial manufacturing costs for these products were higher for the second quarter of FY20 (2QFY20) as the group progressively ramped up volumes. The latter more than offset weaker trading margins.

YTD profit weakness was mainly attributed to: lower sales from the trading division due to weaker demand from local oil and gas projects following the completion of the Refinery and Petrochemical Integrated Development Project; higher production cost recognised in 2QFY20 for the initial shipment of CS exports; and higher finance costs.

The above more than offset the recovery of US export volumes for CS products since end-2QFY20. Additionally, lower taxes cushioned the YTD bottom line decline.

Plant utilisation remained largely stable and healthy in 3QFY20 as follows: Pasir Gudang (stainless steel) at 90%, Klang (CS) at 90%, and Nautic UK (copper, nickel and alloy) at 65%.

The group declared third interim dividend per share of 0.5 sen (3QFY19: 0.51 sen) which was within expectations.

At this juncture, Pantech is keen to embark on merger and acquisition exercises on the back of its healthy balance sheet and pursuit of inorganic growth. Additionally, we expect the group will benefit from the ramp-up in local upstream capital expenditure (capex) spend by Petronas.

We maintain “buy” on Pantech with an unchanged TP of 57 sen based on 10 times price-earnings ratio in calendar year 2020. We expect profit expansion in FY20-FY21 following the recovery of CS exports, and coupled with acceleration of Petronas’ local upstream investments. — TA Securities, Jan 16