Source:INSIDER ASIA
WE remain upbeat on Pantech Group's (63 sen) prospects. Orders for its pipes, fittings and flow control products (PFF) have held up well in the past few months, despite heightened global market uncertainties. This bodes well for the company's underlying business, which is expected to fare relatively well in the current downturn.
Exceptionally strong FY09 earnings results
Pantech's recently released earnings results for the financial year (FY) ended February 2009 underscore its resilience.
Turnover in 4QFY09 was up almost 84% year-on-year (y-o-y) and 5% quarter-on-quarter (q-o-q) at RM139.4 million, its strongest quarterly sales since listing in early 2007. For the full year, Pantech reported a robust 74.4% increase in net profit to RM59.6 million - after taking into account some RM9.2 million in provision for stock writedown.
Profits to "normalise" in FY10
The last financial year was an exceptional year for Pantech, with demand and prices for steel products reaching record highs in mid-2008. However, this is not sustainable. We expect earnings will adjust lower in the current financial year before resuming the growing trend in FY11.
Pantech has yet to experience any order cancellations since the US subprime crisis deepened into a global recession. However, buyers are very cautious on over-stocking, given the clouded economic outlook, tight credit market and expectations of even lower prices. Most are buying just enough for their immediate consumption.
Steel prices to stay weak near-to-medium term
Prices for steel products corrected sharply in the second half of 2008 (2H08). Although steel prices did tick higher in January 2009, the outlook has deteriorated again of late and prices have begun drifting lower anew. This may be attributed, in part, to increased production in anticipation of massive government stimulus packages. But demand has not kept pace.
World crude steel production is expected to fall sharply in 2009, after declining 1.2% last year, perhaps by as much as 10%-15%. Production has fallen 22.8% y-o-y in 1Q09. Many steel millers are producing at half their capacity whilst trying to bring inventory levels down. The massive capacity overhang is expected to keep a lid on price increases in the near-to-medium term.
Expectations of lower raw material costs, primarily iron ore and metallurgical coal, will further weigh on prices. New annual contracts for coal have been set at less than half of 2008's benchmark prices while iron ore prices are widely expected to be at least 30% cheaper.
But PFF demand from oil & gas still good
On the positive note, demand for PFF from the oil & gas sector has remained fairly firm. There has been some inevitable slowdown especially within Pantech's manufacturing arm, which is geared towards the export market. But the trading arm, which caters primarily to domestic demand, is still doing well.
Oil projects are long term in nature and are less likely to be swayed by short-term price volatilities. To be sure, the sharp drop in crude oil prices may delay some new marginal exploration and development projects but most committed projects are going ahead as are companies' maintenance and replacement cycles.
Crude oil will remain the world's primary fuel source for the foreseeable future. Indeed, oil prices may start trending higher in 2H09, especially if inflationary pressures from aggressive stimulus policies kick in and the US dollar weakens.
Pantech is estimated to have some RM180 million worth of orders in hand, which should keep it busy till September 2009. Trading margins should remain fairly resilient as sales are priced on a cost-plus basis but manufacturing's profitability will be affected by lower utilisation. We estimate Pantech's plant utilisation to have fallen to about 70% from as high as 90% previously.
Expect balance sheet to strengthen
Pantech's sales are forecast to contract by roughly 27% in FY10 as the result of weaker selling prices and demand. Net profit is estimated to fall by a similar quantum to roughly RM42.9 million or 11.4 sen per share.
Both sales and net profit should recover in FY11 after the current adjustment period. We estimate earnings will grow 16% to RM49.6 million in the next financial year.
We also expect the company's gearing to improve on the back of working capital reversal. Pantech has slowed its raw material purchase, mainly of seamless steel pipes, and stock levels will fall in the coming months. The company is acquiring a piece of land adjacent to its existing manufacturing facility but has delayed plans to expand capacity, for now.
Attractive P/E valuations and yields
Pantech shares are priced well below the broader market's average price-to-earnings (P/E) valuation at roughly 5.5 and 4.8 times our estimated earnings for FY10-FY11, respectively. The stock is especially attractive when benchmarked against its longer-term growth prospects.
Pantech also offers decent yields. The company has already paid two sen per share net dividends for FY09, including 0.8 sen per share special dividends. It has proposed a final dividend of one sen per share, bringing total dividends to three sen per share for FY09. The entitlement date is yet to be fixed.
However, in line with lower earnings, we estimate dividends to drop to about two sen per share in FY10. Nevertheless, this will still give shareholders a fairly decent net yield of 3.2% at the current share price.
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.
Exceptionally strong FY09 earnings results
Pantech's recently released earnings results for the financial year (FY) ended February 2009 underscore its resilience.
Turnover in 4QFY09 was up almost 84% year-on-year (y-o-y) and 5% quarter-on-quarter (q-o-q) at RM139.4 million, its strongest quarterly sales since listing in early 2007. For the full year, Pantech reported a robust 74.4% increase in net profit to RM59.6 million - after taking into account some RM9.2 million in provision for stock writedown.
Profits to "normalise" in FY10
The last financial year was an exceptional year for Pantech, with demand and prices for steel products reaching record highs in mid-2008. However, this is not sustainable. We expect earnings will adjust lower in the current financial year before resuming the growing trend in FY11.
Pantech has yet to experience any order cancellations since the US subprime crisis deepened into a global recession. However, buyers are very cautious on over-stocking, given the clouded economic outlook, tight credit market and expectations of even lower prices. Most are buying just enough for their immediate consumption.
Steel prices to stay weak near-to-medium term
Prices for steel products corrected sharply in the second half of 2008 (2H08). Although steel prices did tick higher in January 2009, the outlook has deteriorated again of late and prices have begun drifting lower anew. This may be attributed, in part, to increased production in anticipation of massive government stimulus packages. But demand has not kept pace.
World crude steel production is expected to fall sharply in 2009, after declining 1.2% last year, perhaps by as much as 10%-15%. Production has fallen 22.8% y-o-y in 1Q09. Many steel millers are producing at half their capacity whilst trying to bring inventory levels down. The massive capacity overhang is expected to keep a lid on price increases in the near-to-medium term.
Expectations of lower raw material costs, primarily iron ore and metallurgical coal, will further weigh on prices. New annual contracts for coal have been set at less than half of 2008's benchmark prices while iron ore prices are widely expected to be at least 30% cheaper.
But PFF demand from oil & gas still good
On the positive note, demand for PFF from the oil & gas sector has remained fairly firm. There has been some inevitable slowdown especially within Pantech's manufacturing arm, which is geared towards the export market. But the trading arm, which caters primarily to domestic demand, is still doing well.
Oil projects are long term in nature and are less likely to be swayed by short-term price volatilities. To be sure, the sharp drop in crude oil prices may delay some new marginal exploration and development projects but most committed projects are going ahead as are companies' maintenance and replacement cycles.
Crude oil will remain the world's primary fuel source for the foreseeable future. Indeed, oil prices may start trending higher in 2H09, especially if inflationary pressures from aggressive stimulus policies kick in and the US dollar weakens.
Pantech is estimated to have some RM180 million worth of orders in hand, which should keep it busy till September 2009. Trading margins should remain fairly resilient as sales are priced on a cost-plus basis but manufacturing's profitability will be affected by lower utilisation. We estimate Pantech's plant utilisation to have fallen to about 70% from as high as 90% previously.
Expect balance sheet to strengthen
Pantech's sales are forecast to contract by roughly 27% in FY10 as the result of weaker selling prices and demand. Net profit is estimated to fall by a similar quantum to roughly RM42.9 million or 11.4 sen per share.
Both sales and net profit should recover in FY11 after the current adjustment period. We estimate earnings will grow 16% to RM49.6 million in the next financial year.
We also expect the company's gearing to improve on the back of working capital reversal. Pantech has slowed its raw material purchase, mainly of seamless steel pipes, and stock levels will fall in the coming months. The company is acquiring a piece of land adjacent to its existing manufacturing facility but has delayed plans to expand capacity, for now.
Attractive P/E valuations and yields
Pantech shares are priced well below the broader market's average price-to-earnings (P/E) valuation at roughly 5.5 and 4.8 times our estimated earnings for FY10-FY11, respectively. The stock is especially attractive when benchmarked against its longer-term growth prospects.
Pantech also offers decent yields. The company has already paid two sen per share net dividends for FY09, including 0.8 sen per share special dividends. It has proposed a final dividend of one sen per share, bringing total dividends to three sen per share for FY09. The entitlement date is yet to be fixed.
However, in line with lower earnings, we estimate dividends to drop to about two sen per share in FY10. Nevertheless, this will still give shareholders a fairly decent net yield of 3.2% at the current share price.
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.