This article first appeared in The Edge Financial Daily on April 19, 2018 - April 25, 2018

Pantech Group Holdings Bhd
(April 18, 54.5 sen)
Reiterate buy with a higher target price of 78 sen: Pantech Group Holdings Bhd is expected to release the results of its fourth quarter of financial year 2018 (4QFY18) on April 27. To recap, Pantech’s results for the first nine months of FY18 grew 87.3% year-on-year on the back of a strong demand from the Refinery and Petrochemical Integrated Development (Rapid) project and a high utilisation rate for its plants. We expect this trend to continue in 4QFY18 and estimate quarterly earnings of RM8 million to RM12 million, on the back of 90% utilisation rate at its stainless steel and steel plants and about RM100 million in trading revenue, underpinned by Rapid orders. This implies a total FY18 core net profit (CNP) of RM44 million to RM49 million. We note that this is the highest CNP realised by the group since FY15. That said, we note that the shorter working month of February may present a downside risk to earnings.

To recap, US President Donald Trump announced his intention to enforce a 25% tariff on steel imports, citing national security reasons. Although he made exceptions for various countries, including Canada, Mexico, the European Union, and Australia, hot-rolled coil (HRC) prices in US have risen. We note that HRCs are Pantech’s main raw materials. Hence, higher prices will increase the group’s material cost. Nevertheless, we understand from management that the increased cost will mostly be passed on to its clients. Thus, we opine that rising prices of HRCs will benefit Pantech, as its clients choose to stock up inventory in anticipation of increased product prices while increased costs are passed on. Therefore, this will increase demand for Pantech’s products and result in margin and revenue expansion.

We note that Rapid in Pengerang is expected to begin operations in early calendar year 2019 (CY19). We understand that Pantech expects about RM200 million of Rapid orders per annum in FY18-FY19. Despite the completion of Rapid, we opine that orders from Pengerang will not dry up. This is premised on sales from Pantech’s warehouse arising from maintenance activities at the site, and development of the larger Pengerang Integrated Complex (PIC) with expected remaining capital expenditure of US$11 billion. Thus, we do not expect orders from Pengerang to slow down until full completion of the PIC. — TA Securities, April 18