by InsiderAsia
SHARES of Pantech Group Holdings (93.5 sen) performed very well in 2009, gaining 120% over the year and far outperforming the benchmark FBM KLCI's 45.2% gain. We believe the stock has the potential to outperform the broader market again this year, given its still attractive valuations and good longer-term growth prospects.
Pantech's shares are currently trading at only 6.1 times our estimated annualised earnings for 2010. This is well below the average valuations for oil & gas stocks (estimated at about 10-12 times forward earnings) as well as the broader market (about 15 times).
More importantly, we believe the company's growth prospects remain strong. Hence, its shares price should continue to rise in line with earnings expansion over the next few years.
Slowdown in local demand in 2H09
Pantech's sales and net profit are expected to contract by about 16% and 13%, respectively, for the current financial year ending February 2010.
The drop is to be expected given the slump in demand and prices for steel products compared to the previous year. In fact, it should be noted that its earnings contraction is still far smaller than that recorded by most steel manufacturers in 2009, underscoring the relative resilience of the pipes, fittings and flow controls (PFF) sub-segment of the steel market.
Pantech's biggest customers are from the oil & gas industry, where its PFF products are used to transport all types of fluids and gases. The company carries an extensive product range in excess of 20,000 inventory items and thus is able to offer customers a timely and comprehensive solution to their needs. This gives Pantech a strong advantage, especially in the local oil & gas market, which accounts for about 70% of the company's sales. Its primary competitors are foreign trading companies, including those based in Singapore.
Sales in 3QFY10 saw a drop in its trading business. This was due, primarily, to the slowdown in the award of contracts from Petronas in 2H09. Hence, we expect business volume will remain flattish in 4QFY10.
Positively, the flow of contracts from the national oil company has picked up pace in recent weeks and should continue to improve over the coming months. As such, we expect demand for Pantech's products will strengthen in FY11.
Recovery in export markets
Utilisation at its manufacturing plant too has registered improvement, currently up to about 80% of its 16,500 MT per year capacity.
Sales for the manufacturing arm, primarily to overseas markets, slumped in 2009 hurt by the global credit crunch and economic downturn. But the business unit reported a 51% increase in sales in 3QFY10, suggesting a gradual recovery in demand as the global economic recovery unfolds. In particular, the company has seen encouraging pick-up in orders from its biggest market in the US.
Pantech is also making good progress into the euro zone market. Recall that the company gained approval from the EU Commission to sell its products in the euro zone without attracting the hefty anti-dumping duties currently levied on many countries, including Malaysia, in 2009. A review on its status is slated for 2Q10. A positive outcome will open up more markets in the region.
Similarly, the company is believed to be making good inroads in its attempt to expand its market in the Middle East, especially in oil-rich Saudi Arabia.
We believe the pick-up in demand from both the local and export markets will underpin growth going forward. We conservatively assume sales and earnings to grow by about 10% and 14%, respectively, for FY11.
Expanding range to higher value-added products
One of Pantech's growth strategies has been to move towards higher value products, such as anti-corrosive PFF for the subsea segment of the oil & gas industry.
The company acquired a piece of land totalling some 20 acres in the Pasir Gudang industrial area, Johor last year. The plan is to use part of the land for its new corporate office and warehouse, which will consolidate its southern region warehouse, office and supply chain.
Also on the drawing board are plans to build a new factory — to expand its current range of manufactured PFF range to include higher value-added stainless steel and alloy products. At the moment, Pantech manufactures carbon steel fittings, primarily for the overseas market.
Total capex for the initial phase is estimated at RM50 million. If all goes well, the new factory would be operational by 2H10 — and will underpin growth in 2011-2012. Pantech's longer-term plan is to gradually double the capacity for this new manufacturing facility within the next five years.
Net yield estimated at 4.3%
Pantech's balance sheet is in fairly good shape. Gearing stood at 36% at end-November 2009, down from 64% at end-FY09. We expect gearing to increase only slightly from current levels going forward, after taking into account its operating cashflow and capital expenditure for its expansion. Hence, it should be able to maintain our estimated 30% or so dividend payout ratio.
The company proposed a second, single-tier interim dividend of 1.5 sen per share in conjunction with its 3QFY10 results. The stock will trade ex-entitlement on March 23. We believe there is a good chance of a final dividend for FY10. In total, we estimate four sen per share dividends for the current financial year. That translates into a solid net yield of 4.3% at the prevailing share price.
Whilst we do not expect dividends to expand quickly, given that Pantech is still very much a growing company, they should increase in line with the company's earnings. As such, shareholders are most likely to earn gradually higher yields going forward.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
