Pantech Group Holdings (Pantech) will be announcing its 1HFY13 results this week and we are expecting a robust result from the company. This time, we are viewing the company’s prospects from its business partners’ perspective as well as its operating environment, and believe the outcome to be encouraging. As such, we remain upbeat on Pantech’s future growth and prospects thus maintain our BUY recommendation and FV RM0.72 with a possible upgrade after the release of its 1HFY13 results.
Likely to meet expectations. Pantech will announce its 1HFY13 results on 17 or 18 Oct and we are optimistic that the company’s performance will meet our expectations due to the strong performance from its trading, and carbon steel manufacturing divisions, paired with narrowing losses from its stainless steel division. Last but not least, the strong performance from its subsidiary Nautic Steel Ltd will become a significant profit contributor to the Group starting FY13.
On an expansion mode. Pantech has estimated a total of RM67.1m of capex to be invested in FY13, mainly for its buildings, plant and machinery. Earlier this year, it had already paid cash proceeds of RM44.5m (GBP9.5m) to acquire Nautic Steel. The management indicated that it intends to buy a new building in the UK to expand Nautic Steel’s production. All these expenditures indicate that the company is expanding, and we may expect somewhat more commendable growth in the upcoming years. Alternative way to tap into O&G counters. Its business mostly comes from the O&G sector, which contributed approximately 76% to their revenue. We think that the company could be an option for investors to tap into the O&G sector. We conducted a study on its business partners, Petrobras, Keppel Corp and Sembcorp Marine, and learnt that they are expanding their O&G operations. OSK Research recently identified O&G as a sector that will benefit from Budget 2013 and thus, we believe this will be indirectly advantageous to Pantech.
Maintain BUY with FV RM0.72, with a possible upgrade. We remain upbeat on Pantech’s solid foundation and growth prospects as it may be riding on the O&G boom, and thus maintain our BUY recommendation. As the company will be announcing their latest result soon, we prefer to keep our FV at RM0.72 for now but maintain the possibility of revising the fair value upwards.
Likely to meet expectations. Pantech will announce its 1HFY13 results on 17 or 18 Oct and we are optimistic that the company’s performance will meet our expectations due to the strong performance from its trading, and carbon steel manufacturing divisions, paired with narrowing losses from its stainless steel division. Last but not least, the strong performance from its subsidiary Nautic Steel Ltd will become a significant profit contributor to the Group starting FY13.
On an expansion mode. Pantech has estimated a total of RM67.1m of capex to be invested in FY13, mainly for its buildings, plant and machinery. Earlier this year, it had already paid cash proceeds of RM44.5m (GBP9.5m) to acquire Nautic Steel. The management indicated that it intends to buy a new building in the UK to expand Nautic Steel’s production. All these expenditures indicate that the company is expanding, and we may expect somewhat more commendable growth in the upcoming years. Alternative way to tap into O&G counters. Its business mostly comes from the O&G sector, which contributed approximately 76% to their revenue. We think that the company could be an option for investors to tap into the O&G sector. We conducted a study on its business partners, Petrobras, Keppel Corp and Sembcorp Marine, and learnt that they are expanding their O&G operations. OSK Research recently identified O&G as a sector that will benefit from Budget 2013 and thus, we believe this will be indirectly advantageous to Pantech.
Maintain BUY with FV RM0.72, with a possible upgrade. We remain upbeat on Pantech’s solid foundation and growth prospects as it may be riding on the O&G boom, and thus maintain our BUY recommendation. As the company will be announcing their latest result soon, we prefer to keep our FV at RM0.72 for now but maintain the possibility of revising the fair value upwards.
Key Highlights
All eyes on oil & gas majors. Through Nautic Steel, Pantech has access to the oil majors, namely Aramco, Shell, Petrobras, Petronas and many others, to market their products. These giants are ramping up their production and we think this will benefit copper nickel products manufacturers like Nautic Steel. Hence, we believe Pantech may likely be able to ride on the development of O&G sector.
A study on business partners. We studied a few of its business partners to gauge the demand growth for the company. Petrobras’ Business Plan 2012-2016 stated that the company will allocate as much as USD236.5bn for various O&G projects over the next five years and this may help increase the demand for Nautic Steel’s exotic products. Keppel Corp and Sembcorp Marine – which Pantech has established its business network with - charted new record highs in their net order books for offshore & marine services, with YTD orders of SGD8.8bn and SGD9.6bn respectively. We believe that Petrobras’ continuous expansion and the two Singapore-based companies’ strong order books will eventually help to sustain the strong demand growth for Pantech and Nautic Steel products.
O&G will benefit from Budget 2013. Domestically, OSK Research thinks that the O&G sector is one of the sectors that will benefit from Budget 2013 that was announced on 28 Sept. In the process of transforming Malaysia into a global O&G integrated trading hub, the Government has offered various tax benefits to O&G players and this will spur the activities in this sector. As it is a reliable pipes, fittings and flanges (PFFs) provider, we think Pantech stands to gain from such a development as well.
A study on business partners. We studied a few of its business partners to gauge the demand growth for the company. Petrobras’ Business Plan 2012-2016 stated that the company will allocate as much as USD236.5bn for various O&G projects over the next five years and this may help increase the demand for Nautic Steel’s exotic products. Keppel Corp and Sembcorp Marine – which Pantech has established its business network with - charted new record highs in their net order books for offshore & marine services, with YTD orders of SGD8.8bn and SGD9.6bn respectively. We believe that Petrobras’ continuous expansion and the two Singapore-based companies’ strong order books will eventually help to sustain the strong demand growth for Pantech and Nautic Steel products.
O&G will benefit from Budget 2013. Domestically, OSK Research thinks that the O&G sector is one of the sectors that will benefit from Budget 2013 that was announced on 28 Sept. In the process of transforming Malaysia into a global O&G integrated trading hub, the Government has offered various tax benefits to O&G players and this will spur the activities in this sector. As it is a reliable pipes, fittings and flanges (PFFs) provider, we think Pantech stands to gain from such a development as well.
Big hopes for high-margin supply contracts. Pantech is able to produce high-frequency induction long bends for a range of projects like offshore and onshore plants, pipe lines, power plant and more. These contracts require high precision and advanced engineering technology and can fetch lucrative margins as high as 30%-40%. We learnt from our source that Pantech was involved in supplying the induction bends for the Melaka regasification plant and believe that it may be able to win some high-margin contracts from the proposed gas-fired power plant that will be built by Petronas and Keppel Corp in Johor, given its strong presence in such a niche market. Although the volume may not be high, the good margin could be of some bonus to the group.
High potential. Although it is a small company with a market cap of about RM330m, we like Pantech due to the following reasons: (i) the management is clear on its direction and takes things one step at a time to ensure that strong and sustainable growth is achievable, (ii) it has sharp market instincts and an eye for acquiring companies that offer positive synergies, case in point being Nautic Steel, (iii) it is a niche market player offering high-quality products, and is able to ride on the development of the O&G sector.
Maintain BUY with FV RM0.72 under review. We remain upbeat on the company’s future growth as it is well-positioned to tap into the lucrative O&G sector and the demand for its products is growing. Therefore, we maintain our BUY recommendation for Pantech. Its FV is unchanged at RM0.72, with a possible upgrade after its 1HFY13 results release.
Maintain BUY with FV RM0.72 under review. We remain upbeat on the company’s future growth as it is well-positioned to tap into the lucrative O&G sector and the demand for its products is growing. Therefore, we maintain our BUY recommendation for Pantech. Its FV is unchanged at RM0.72, with a possible upgrade after its 1HFY13 results release.
Source: OSK
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