Why PANTECH profits was down?

Raw material cost and weak greenback erode Pantech’s profit

Higher raw material costs and the weak US dollar eroded Pantech Group Holdings Bhd’s earnings in 2QFY2010 ended Aug 31, with its net profit down 37% to RM9.3 million or 2.49 sen per share.

Revenue fell nearly 19% to RM97.1 million from RM119.4 million a year ago. The steel products maker attributed the lower revenue to the contraction in sales volume from its trading division.

Despite the lower profit, Pantech declares its first interim single-tier dividend of one sen per share and a special interim single-tier dividend of 0.5 sen per share of 20 sen.

Pantech manufactures steel products serving the oil & gas (O&G) and plantation industries. The O&G sector is the key earnings contributor despite its beginnings in the plantation industry.

Consequently, the slowdown in the domestic O&G sector has affected its earnings performance.

For the cumulative six-month period ended Aug 31, net profit shed 37% to RM17.72 million from RM28.31 million, while revenue dropped 23% to RM187.45 million from RM243.29 million respectively. Earnings per share shrunk to 4.74 sen from 7.57 sen a year earlier. The company’s net assets per share stood at 66 sen per unit.

Its executive director Adrian Tan said Pantech expected 40% to 50% of its revenue to come from the manufacturing segment from about 20% at present in the next three to five years.

Speaking after the group’s EGM here yesterday, Tan told the media the group wanted to shift its emphasis on manufacturing, a move to expand its revenue base. Its trading business presently contributed 80% to revenue.

With regard to its new stainless steel plant in Pasir Gudang, Johor, which is due to commence production in December, Tan said the relevant machinery was in the process of being installed.

Pantech had invested RM100 million in the plant, which will initially produce stainless steel pipes to be supplied to its trading arm.

Research firm InsiderAsia had said in a recent note that it expected the new plant’s maiden contribution to begin in 4QFY2011 ending Feb 28.

When asked about the effects of the weakening US dollar on the group, Tan said the group had a “natural hedge” against the currency fluctuations as it both bought and sold materials and products in US dollars.

“However, our local operations are affected to a certain degree. For our manufacturing division, up to 80% (of what is produced) is exported, and whatever we sell is marked up,” he said.

“Year-to-date, the ringgit has appreciated about 10% against the US dollar, which has affected our sales, which in turn affects revenue. However, our trading division is not affected that much,” Tan noted.

At the EGM yesterday, Pantech’s shareholders approved the company’s proposed a one-for-five bonus issue and a rights issue of up to RM77.25 million of ICULS and 77.25 million warrants attached on the basis of one for every 10 ICULS subscribed.

They also nodded for the proposed waiver on the major shareholder CTL Capital Holding Sdn Bhd, which holds 13.75% equity stake in Pantech, and several other parties from undertaking a mandatory takeover offer following the rights issue.