Sales grew 35.8% quarter-on-quarter (q-o-q) to RM90.3 million on the back of better demand from both the domestic-oriented trading business as well as export-oriented manufacturing unit.
Recall that trading sales, in particular, dipped sharply in 2HFY10 as a result of a slowdown in contracts flow in the domestic oil & gas sector. Positively, the pace of tender awards has been picking up pace and we expect demand for the company’s pipes, fittings and flow control (PFF) products will continue to strengthen over the next few quarters. Sales for the trading arm were up 44% q-o-q to RM67.5 million, accounting for about three-quarters of total sales.
Its manufacturing arm is also doing better on the back of stronger export orders. Manufacturing sales grew 17% q-o-q to RM22.8 million, despite the stronger ringgit — which resulted in its US dollar denominated sales translating into lesser ringgit sales.
Net profit totalled RM8.4 million in 1QFY11, up 33% q-o-q from the RM6.3 million in the preceding quarter (after excluding the RM4 million in extraordinary gains) — but still lower than the RM13.6 million reported in 1QFY10.
Upbeat outlook for oil & gas
We expect Pantech’s earnings will continue to recover over the next few quarters. Aside from recovering demand, margins should also improve as the company clears out the last of its old, higher priced stocks.
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We believe the company is close to finalising its joint venture with Saudi-based Al-Otaishan Trading Group to set up a manufacturing facility in Saudi Arabia. Pantech is working closely with its partner to secure approval to supply state-owned oil and petrochemical companies in the oil-rich country.
Net profit is estimated at RM49.2 million for FYFeb11 or 13.1 sen per share. That translates into attractive valuations of only 6.9 times forward earnings. We have not taken into account any contribution from its new manufacturing plant for the current financial year.
Bonus and rights issues to part-finance expansion
The new 7,000 metric tonnes per annum manufacturing plant in Johor Bahru is on track for commissioning in 4Q10. The plant will manufacture stainless steel PFF products, to complement its existing carbon steel range.
At least half of the output will substitute products currently imported by Pantech’s trading arm for domestic customers with the balance targeted for exports. The first batch of export orders could ship out by December 2010. Earnings from the new facility will boost growth in FY12 and beyond.
Pantech is already planning to expand capacity at this new plant further, by up to another 6,000 metric tonnes, while its output range will be widened to include higher value added alloy-based pipes and fittings.
To part-finance the expansion, Pantech is undertaking a 1-for-5 bonus and rights issue of irredeemable convertible unsecured loan stock (ICULS) that comes with free warrants. The exercise is likely to be completed in 4Q10.
The ICULS — on the basis of two for every one Pantech share held (before the bonus issue) — is priced at 10 sen per unit. The loan stock carries a 7% coupon rate with a conversion ratio of six to one, exercisable at anytime within a seven-year period.
As a sweetener, shareholders will be offered one free warrant for every 10 ICULS subscribed. The warrants have maturity of ten years and the exercise price is fixed at 60 sen. Post-bonus issue, Pantech’s shares will be adjusted down to about 75 sen based on its current price of 90 sen. This implies that the warrants will already be in-the-money upon completion of the exercise.
Larger share base will enhance liquidity
Currently, Pantech has issued shares totalling 375 million. Assuming full subscription, the exercise will raise some RM75 million from the ICULS proceeds at the outset. Conversion of the warrants will raise a further sum of up to RM45 million.
Upon full conversion of the ICULS and warrants, Pantech’s share base will be enlarged to about 650 million shares. The larger share capital — in step with its growing business — would improve liquidity and should increase the stock’s attractiveness to investors over time. — InsiderAsia
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.
This article appeared in The Edge Financial Daily, August 18, 2010.
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