We continue to like Pantech as a niche steel player leveraging on the positive outlook for the O&G sector. Nautic Steel should remain the company’s main growth driver, while its stainless steel unit is poised to turn around in FY14. These should propel Pantech’s earnings higher. On incorporating the potential dilution from full conversion of its irredeemable convertible unsecured loan stocks (ICULS), we derive a new FV of RM1.00, pegged to a higher PER of 9x FY14F, vs 6x previously. Maintain BUY.
Capitalising on O&G boom. OSK remains upbeat on the O&G sector, which is expected to see heightening activities in 2013 amid stable oil prices. As a one-stop provider of pipes, fittings and flow controls (PFFs), Pantech is well-positioned to ride on this O&G boom. The company’s strength as an alternative player puts it in a sweet spot despite the headwinds facing the steel industry.
Growth nodes intact; 2H looks good. Pantech’s expansion plans for Nautic Steel are progressing well, while its loss-making stainless steel division is recovering and is expected to break even by end-FY13. Going into FY14, we expect to see Nautic Steel and its stainless steel division strengthen further. We think the company will continue to report good 2HFY13 earnings, in line with our forecasts. Furthermore, Pantech may offer investors a decent dividend yield of 6.6% for FY13, assuming a 40% payout ratio at the current share price of RM0.72.
Model under review, but still a BUY. We are reviewing our valuation model and adjusting the company’s share base, assuming that all its irredeemable convertible unsecured loan stock (ICULS) would have been converted into Pantech shares. However, we have yet to adjust for its warrants as these are long dated and out-of-the-money. As such, the stock’s EPS for FY14f will be diluted to 11.1 sen from 13.5 sen previously. We are now pegging Pantech’s valuation at 9x FY14f PE instead of 6x PE, after excluding the dilution impact from our valuation parameters. Hence, our new FV is RM1.00. Reiterate BUY.
Capitalising on O&G boom. OSK remains upbeat on the O&G sector, which is expected to see heightening activities in 2013 amid stable oil prices. As a one-stop provider of pipes, fittings and flow controls (PFFs), Pantech is well-positioned to ride on this O&G boom. The company’s strength as an alternative player puts it in a sweet spot despite the headwinds facing the steel industry.
Growth nodes intact; 2H looks good. Pantech’s expansion plans for Nautic Steel are progressing well, while its loss-making stainless steel division is recovering and is expected to break even by end-FY13. Going into FY14, we expect to see Nautic Steel and its stainless steel division strengthen further. We think the company will continue to report good 2HFY13 earnings, in line with our forecasts. Furthermore, Pantech may offer investors a decent dividend yield of 6.6% for FY13, assuming a 40% payout ratio at the current share price of RM0.72.
Model under review, but still a BUY. We are reviewing our valuation model and adjusting the company’s share base, assuming that all its irredeemable convertible unsecured loan stock (ICULS) would have been converted into Pantech shares. However, we have yet to adjust for its warrants as these are long dated and out-of-the-money. As such, the stock’s EPS for FY14f will be diluted to 11.1 sen from 13.5 sen previously. We are now pegging Pantech’s valuation at 9x FY14f PE instead of 6x PE, after excluding the dilution impact from our valuation parameters. Hence, our new FV is RM1.00. Reiterate BUY.
KEY HIGHLIGHTS
A niche player. There has been limited recovery in local steel prices despite a rebound in international steel prices in the past few weeks. This is in view of the fact that domestic long steel product prices have held steadier than the latter in the recent downcycle. However, we believe that a niche steel player like Pantech, which is not directly affected by the fluctuation in steel prices, may be a good alternative play for the sector. Moreover, the company has positioned itself in the booming oil and gas (O&G) sector to ride on the rising tide.
Pantech’s growth correlates to O&G sector capex. With more than 80% of Pantech’s revenue coming from the O&G sector, we can infer that its growth is positively correlated to the expansion in O&G. Pantech will in particular be the beneficiary when the oil majors allocate capex to beef up production capacity or for maintenance purposes. Our O&G analyst is still of the view that crude oil price is likely to stabilize at about USD80/barrel as prices are likely to be supported by tensions in Middle East and economic stimulus programmes in the west. With a more stable oil price, oil majors would feel more comfortable in allocating capital expenditure, which is positive for Pantech.
Pantech’s growth correlates to O&G sector capex. With more than 80% of Pantech’s revenue coming from the O&G sector, we can infer that its growth is positively correlated to the expansion in O&G. Pantech will in particular be the beneficiary when the oil majors allocate capex to beef up production capacity or for maintenance purposes. Our O&G analyst is still of the view that crude oil price is likely to stabilize at about USD80/barrel as prices are likely to be supported by tensions in Middle East and economic stimulus programmes in the west. With a more stable oil price, oil majors would feel more comfortable in allocating capital expenditure, which is positive for Pantech.
An O&G boom in 2013. For 2013, OSK Research believes that Malaysia’s O&G sector will boom given that national oil corporation Petronas has a three-pronged development blueprint involving: (i) enhancing oil recovery at existing mature oilfields, (ii) the development of marginal oilfields, and (iii) enlarging its resource base, which will spur activities in the domestic O&G sector. As such, all O&G related companies will enjoy an advantage while suppliers to these O&G companies, like Pantech, will reap indirect benefits.
Nautic Steel continues to drive Pantech’s growth. Nautic Steel will continue to be the main growth driver for Pantech’s trading and manufacturing divisions. The company can leverage on Nautic Steel’s brand name and market its products to global oil majors while increasing capacity to produce more specialized products such as copper nickel and duplex. We understand from Pantech that the company is currently boosting Nautic Steel’s capacity and will come up with a better product mix in FY14, which will help to increase group sales and earnings.
Nautic Steel continues to drive Pantech’s growth. Nautic Steel will continue to be the main growth driver for Pantech’s trading and manufacturing divisions. The company can leverage on Nautic Steel’s brand name and market its products to global oil majors while increasing capacity to produce more specialized products such as copper nickel and duplex. We understand from Pantech that the company is currently boosting Nautic Steel’s capacity and will come up with a better product mix in FY14, which will help to increase group sales and earnings.
Getting some shine from stainless steel. As we highlighted earlier, apart from focusing on Nautic Steel’s expansion, Pantech is also working on improving the efficiency of its stainless steel division, which is expected to break even by end-FY13. If Pantech succeeds in taking Nautic Steel to break even point in FY13, this would mark a milestone as it too kthe company only one-and-a-half years to generate profit from a newly commissioned manufacturing plant. Nevertheless, we prefer to be prudent thus only factor in a small earnings contribution from this division in FY14f as sales may take time to pick up.
Dividend yield still appealing. In the last few quarters, Pantech has honoured its promise of rewarding its shareholders with a decent dividend payout. In FY11 and FY12, the company paid out 3.3 sen and 3.5 sen respectively, representing a dividend payout ratio of more than 40%. Assuming Pantech adopts a 40% dividend payout ratio for FY13, which we think is highly possible, the stock’s dividend yield will reach 6.6% based on its last closing price of RM0.720. That said, we still find this payout quite attractive.
Dividend yield still appealing. In the last few quarters, Pantech has honoured its promise of rewarding its shareholders with a decent dividend payout. In FY11 and FY12, the company paid out 3.3 sen and 3.5 sen respectively, representing a dividend payout ratio of more than 40%. Assuming Pantech adopts a 40% dividend payout ratio for FY13, which we think is highly possible, the stock’s dividend yield will reach 6.6% based on its last closing price of RM0.720. That said, we still find this payout quite attractive.
Directors show more confidence in the company. Pantech has Irredeemable Callable Unsecure Loan Stocks (ICULS) and warrants that will eventually enlarge its share base and subsequently dilute the stock’s EPS on full conversion. We note that Pantech’s directors have been converting their ICULS, which positive as it shows that the company’s directors are confident on its prospects. By converting ICULS that are out-of-the-money (or at most, barely in the money), the directors are actually forfeiting a steady 7% annual income from the ICULS. This move also implies that the company’s directors are comfortable with the dividend payout for a 5%-6% yield plus a potential capital gain, which may make the total return possibly greater than the ICULS’ 7% interest payment.
Reviewing model and addressing dilution concerns. We had earlier addressed the concerns over a potential dilution by incorporating a lower PE valuation of 6x. After reviewing our valuation model, we are also including the dilution impact on the stock’s EPS arising from conversion of the ICULS. However, we did not include the dilution impact of the warrants as these are still out-of-the-money and long dated in maturity. To be prudent, we are assuming that all shareholders converted their ICULS, from which we derive our new valuation base. This leads to Pantech’s FY14F EPS being diluted from 13.5 sen to 11.1sen.
Is 9x PE justifiable? Given the concerns over a potential dilution, we had previously pegged Pantech’s FV to a conservative 6x FY14f PE. As we incorporated the dilution impact in our EPS estimate, we are taking a relook at our earnings base valuation. Considering that more than 80% of Pantech’s revenue is from the O&G sector, we can possibly benchmark Pantech as an O&G services supplier, which then makes it a niche player instead of a boring steel company. From the data gathered, we learnt that domestic O&G services suppliers are trading at around 10.0x to 12.0x. As Pantech is a steel company that has similar macro exposure to companies in the O&G sector, and has business relationships with international oil majors such as Qatar Petroleum, Kuwait Oil Company, Petronas, BP, Esso, Shell and the Brazilian Navy, the 9x forward PE is justifiable and still conservative.
Commendable earnings seen. We expect more good results from Pantech in 2HFY13. We think its 3Q earnings growth may be flat q-o-q but still deem it attractive due to the higher base from 2QFY13. Meanwhile, we also suspect that sales in 4Q may slow down further but are not overly concerned the numbers would be affected by the seasonal festive celebrations (Christmas, New Year and Chinese New Year). As such, we are confident that Pantech would meet our earnings forecast for FY13.
Maintain BUY, but FV higher at RM1.00. Backed by our bullish view on the O&G sector and the company’s plan to position itself as a niche player in such a lucrative sector, we are confident that Pantech will continue to deliver strong results in the upcoming quarters. Thus we reiterate our BUY recommendation, with our FV revised upward to RM1.00, based on 9x FY14F PE.
Maintain BUY, but FV higher at RM1.00. Backed by our bullish view on the O&G sector and the company’s plan to position itself as a niche player in such a lucrative sector, we are confident that Pantech will continue to deliver strong results in the upcoming quarters. Thus we reiterate our BUY recommendation, with our FV revised upward to RM1.00, based on 9x FY14F PE.
Source: OSK
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