Pantech Group Holdings - A Solid Start Seen

We expect Pantech Group Holdings (Pantech) to report healthy 1QFY13 earnings growth, mainly due to the profit contribution from newly acquired UK-based Nautic Group, continuous improvement at its stainless steel division, and solid performance from the carbon steel segment. Pantech has been adopting a generous dividend payout of more than 40% in the last two financial years and should continue to do so. With the company’s outlook becoming more upbeat, we are taking a relook at our valuations and revising higher our parameters from a 5x FY13 P/E to 6x FY13 P/E, from which we derive a new fair value of RM0.72. This should give investors a decent potential upside of 35.8% and thus we upgrade Pantech to BUY.

A good start in sight. We expect Pantech to report healthy 1QFY13 earnings growth, mainly boosted by the maiden contribution from its newly acquired UK subsidiary, Nautic Group, the gradual improvement in its stainless steel segment, as well as steady contribution from its well-established carbon steel division.

Strong contribution from Nautic Group. Pantech acquired Nautic Group in March 2012 (beginning of 1QFY13) for GBP9m (about RM45.0m). One of the conditions imposed on the transaction is that the founder of Nautic has to stay on with the company for a year to ensure a smooth transition and ensure that Pantech does not have to go through the hassle of restructuring the former’s operations. As such, we expect the profit from Nautic to start flowing in as soon as from 1QFY13, and possibly increase as Pantech makes improvements in the unit’s operations and sales.

Stainless steel business on the mend. It has been a steep learning curve for Pantech, but after a long gestation of one-and-a-half years, we believe its stainless steel division is maturing and its losses should begin to narrow. We expect this division to at least break even, if not contribute a marginal profit, in FY13. While we understand that it is usual for a manufacturing company to incur losses at the early stages of a new plant, we think Pantech has been making good progress in its stainless steel business venture.

Lucrative dividend payout may continue. Pantech has been very generous in its dividend payout in the last two financial years. The company’s dividend payout ratio was more than 40% in both FY11 and FY12. We believe the company may maintain this lucrative payout policy for its financial year ending February 2013.

Upgrade to BUY, FV revised upward. Pantech’s carbon steel division has always been stable and profitable. In view of the contribution that it now receives from the Nautic Group and improvement in its stainless steel division, we are confident that Pantech’s 1QFY13 performance should improve both q-o-q and y-o-y. This means that its near-term profit outlook should brighten. These positive signals prompt us to revisit our valuations and tweak our parameters higher from a 5x FY13 P/E to 6x FY13 P/E. Accordingly, we revise upward our FV to RM0.72, which offers a 35.8% share price upside from its last close. As such, we upgrade Pantech to a BUY from TRADING BUY previously. At the current share price of RM0.530, we see a window of opportunity to accumulate the stock at lower cost.


Source: OSK