Pantech Group Holdings Bhd
(June 24, 83.5 sen)
Maintain buy at 84 sen with a target price of RM1.30: Contrary to market worries, Pantech Group’s orders from the US are unaffected by the fiasco created by BP in the Macondo well. As the calamity has beefed up maintenance activities and tightened up compliance checks against stringent requirements, the demand for Pantech’s manufactured products has not dwindled.
Apparently, it has US$10 million worth of manufacturing orders from the US alone that will last until this December.
This is a big improvement compared to total shipment worth US$9 million to the US in FY10. As we believe total group sales in 1QFY11 has returned to the RM90 million to RM95 million levels (almost at par with 3QFY10 sales of RM92.2 million, but much higher than 4QFY10 sales of RM66.5 million), the manufacturing and the US-based manufacturing sales could have exceeded RM20 million and RM12 million for the quarter. Including this, FY11 manufacturing sales destined to the US could grow more than 50% year-on-year.
At 90% utilisation, we understand that its manufacturing facility is running almost at full utilisation and this will last until September. Overseas markets make up about 80% of
manufacturing sales, with the bulk coming from the US (about 60% of manufacturing sales).
We understand that its Pasir Gudang facility to produce stainless steel and alloy pipes and fittings is also coming onstream as scheduled. It is about 50% completed and will be ready by this November for testing and commissioning. Production is expected to start in December and could contribute RM20 million sales in 4QFY11 if everything goes as planned.
As highlighted in earlier reports, the Saudi Arabian plant will only start contributing in FY12 as its partner has not started works on the facility, pending approval from Saudi Aramco to include Pantech on its approved vendor list. The green light could come in by end-2010 before work starts.
Our worries currently are entrenched in its trading division due to an over reliance on domestic market, which has not shown much improvement in activities over the last six months.
It derives about 80% of its trading division’s domestic market sales, while the remaining 20% comes mainly from Indonesia, Singapore and the Middle East.
A potential slow pick-up in the trading division could lead to a flat 1QFY11 net profit on a quarter-on-quarter basis. Nevertheless, it is important to note that 4QFY10 net profit of RM10.3 million was inclusive of an inventory write-back of RM4 million. Excluding that our expected profit range of RM9 million to RM10.5 million was a big improvement.
We are monitoring order flows closely and may have to lower our FY11 and profit forecast by 10% to RM51.6 million if things do not improve over the next two months.
Maintain buy on the stock, but with a lower target price of RM1.30 after imputing a 30% discount to CY11 target sector PER of 11 times (7.7 times) due to a potential downgrade in CY11 earnings, its low liquidity and smaller market cap. — TA Securities Holdings Bhd, June 24
Written by Kay
The Edge Malaysia
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