This article first appeared in The Edge Financial Daily on June 4, 2018 - June 10, 2018

KUALA LUMPUR: Pantech Group Holdings Bhd recently reported its best financial performance so far since the crude oil price slump that started in mid-2014.

The group reported a net profit of RM46.97 million for its financial year ended Feb 28, 2018 (FY18), 58% higher than its FY17 net profit of RM29.72 million. Revenue grew by 28% to RM614.68 million.

The improvement in performance for Pantech, which is involved in the manufacturing and trading of a wide range of pipes, valves and fittings (PVF) for fluid handling systems, is in tandem with the recovery in the oil and gas (O&G) sector.

Crude oil prices have increased by 175% to US$76.87 (RM305.94) per barrel last Friday from US$28 per barrel in early 2016, thus giving support to the O&G sector.

Pantech executive director Adrian Tan said the group is positive about prospects for FY19.

“Every year we set a target of 15% year-on-year revenue growth. We should be able to achieve this looking at some of the O&G projects coming from Sabah and Sarawak and with contribution from export sales from our main export markets such as Indonesia, the US and the Middle East.

“In 2016, oil prices dropped below US$30 per barrel and this affected the O&G industry as projects slowed down. For us, we were relying on maintenance services during the low oil price environment to [keep the momentum going], and we also embarked on a cost-cutting exercise,” he told The Edge Financial Daily in an interview.

“Today, oil prices have returned to the normal market situation at over US$70 per barrel and we are seeing more upstream projects coming online. We also benefitted from the shale gas [boom] in the US, which forms part of our export markets, as a lot of our products have been shipped there,” he said.

He added that Pantech’s manufacturing order book is currently at RM150 million, which would last till September.

“We are now collecting new orders for October 2018 [onwards],” shared Tan.

Business has been picking up, evidenced by the fact that two of its plants, namely the 21,000 tonnes per year carbon steel fitting plant in Kapar, Selangor and the 16,500 tonnes per year stainless steel pipe plant in Pasir Gudang, Johor — are both running at full capacity.

“We are spending about RM40 million in capital expenditure this year to buy equipment, in order to increase our manufacturing capacity,” said Tan.

Pantech also has a hot-dip galvanising plant in Pasir Gudang, which has a capacity of 48,000 tonnes per year. The plant, which started operations in December 2016, is currently running at 50% capacity.

The group’s sole manufacturing outside Malaysia is its nickel alloys and copper manufacturing plant Nautic Steels Ltd, which is located in the UK. The plant has a capacity of 800 tonnes per year and is currently 65% utilised.

Pantech’s client base comprises mostly leading O&G companies in Malaysia, and the group is on Petroliam Nasional Bhd’s (Petronas) list of international vendors for specified items.

The group is also a beneficiary of Petronas’ Refinery and Petrochemical Integrated Development (Rapid) project in Pengerang, Johor.

In FY17, the Rapid project contributed 21% of group revenue, and this increased to 24% in FY18. Pantech has a warehouse in Pengerang to cater for the needs of the project.

“We have been blessed with the Rapid project, which provides a lot of business opportunities for us. Our business [with parties involved] in Rapid has been booming,” he said.

As of February 2018, the group had a total cash balance including fixed deposits of RM70.22 million. Its total borrowings amounted to RM176 million.

“Comparing the cash and fixed deposits against the total borrowings, Pantech Group is not in a net cash position. However, this is not necessarily a bad position as we are employing assets to work.

“Pantech Group's borrowings are mainly trade facilities, for our working capital rolling purpose. Our gearing ratio is 0.32 times and this is actually pretty low,” said Tan.

Pantech shares were at an all-time high of 80.1 sen on July 17, 2014 — when the oil price was at US$108 per barrel. Its shares plummeted by 55% to as low as 35.9 sen on Aug 26, 2015.

Its share price has recovered since then, closing at 60.5 sen last Friday and with a market capitalisation of RM449 million. Its price, according to Bloomberg, is at 8.9 times its forward earnings.

This is considered cheap compared with other O&G stocks such as Wah Seong Corp Bhd, which is valued at 10 times, and KNM Group Bhd, which is at 12.19 times.

All four research firms that cover Pantech have “buy” calls on the stock. JF Apex has a target price (TP) of 84 sen, TA Securities Research (77 sen), AllianceDBS Research (85 sen), while Kenanga Research has an “outperform” call on the stock with a TP of 75 sen.

In its note to clients, Kenanga said that its call was premised on Pantech’s profit margin recovery and its healthy balance sheet, as well as higher order book visibility.