This article first appeared in The Edge Financial Daily on July 3, 2017 - July 9, 2017

Pantech Group Holdings Bhd
(June 30, 58 sen)
Recommend buy with a target price of 58 sen: Investors have reacted positively after Pantech Group Holdings Bhd reported good earnings results for its fourth quarter ended Feb 28, 2017 (4QFY17) in late-April. Its share price reached a high of 66 sen but has since given back some of the gains. We believe this is due to renewed weakness in crude oil prices. However, we believe the market will rerate the stock higher when the company continues to deliver earnings growth through the next few quarters. Pantech is set to release its results for 1QFY18 on July 26.

Improved demand and better selling prices in the past few months suggest another strong quarter of earnings. Indeed, orders have continued to show underlying strength. Brent crude dipped under US$45 (RM193.05) per barrel last week, the lowest level in 2017. By comparison, prices averaged just under US$54 per barrel in the first five months of this year. Despite Opec and key non-Opec producers (mainly Russia) agreeing to extend production cuts up to end-March 2018, rising supplies from the US as well as Libya and Nigeria (exempted from Opec cuts) are keeping the market oversupplied. The renewed oil-price weakness is, unsurprisingly, hurting sentiment for oil and gas stocks. However, we remain upbeat about Pantech’s prospects.

The trading arm is doing well with the refinery and petrochemical integrated development (Rapid) project staying on track. Sales from Rapid for FY18 are expected to exceed that in the last financial year. Trading contributions will outpace that of the manufacturing unit in the near to medium term. The increased sales will, in turn, translate into better margins with economies of scale.

Meanwhile, the company is continuing to enjoy strengthening orders for its manufacturing arm — although near-term earnings will be affected by losses at the galvanising plant. In particular, more than half of its export sales are derived from US oil producers where production has rebounded strongly. Rig count in the US has risen steadily since hitting a low in May 2016 and has more than doubled in numbers currently. Production is likely to increase going forward as continued technological advancement and production efficiency push break-even prices lower.

Pantech foresees improved demand from other parts of the world following the collapse in activities last year. New and delayed projects are being restarted, albeit slowly, as oil majors and countries seek to replace depleting existing projects. The company’s manufacturing plants (both stainless and carbon steel) are running near full capacity with orders in hand up until October 2017. Pantech is planning to add more equipment and workers to meet rising demand.

We also expect the company to generate positive free cash flow. Pantech has maintained dividends through the worst of the oil and gas downturn. Dividends totalled 1.8 sen per share or about 37% of profits in FY17. Assuming a 40% payout, dividends should total some 2.6 sen to three sen per share for the next two financial years, this will give shareholders a net yield of 4.5% to 5.2% at the prevailing share price.

The company has a healthy balance sheet. Based on our earnings forecast and assumed dividends, we expect the company’s gearing to lower gradually, from the current 14%.

In short, we believe there remains good upside for the stock. We recommend “buy”. — Asia Analytica, June 30