This article first appeared in The Edge Financial Daily, on October 1, 2015.

Pantech Group Holdings Bhd
(Sept 30, 58 sen)
Upgrade to market perform call but lower target price (TP) to 60 sen. TP is revised downwards from 67 sen previously, as we downgrade our target price-earnings ratio (PER) to eight times from nine times previously, in view of the weaker oil price outlook for the next two years. 

This is consistent with the eight times PER multiple that we have applied to small-cap players.

On Tuesday, Pantech Group Holdings Bhd (Pantech) entered into a joint-venture (JV) agreement with Euromech Machinery Sdn Bhd (EMSB) to establish a new JV company named Pantech Galvanising Sdn Bhd (PGSB). 

The JV aims to provide hot-dip galvanising services, with Pantech holding a 51% stake in PGSB. 

EMSB is a locally incorporated company which is involved in the manufacturing and fabrication of conveyor systems. 

We are positive on the JV as it will enable Pantech to expand its business into galvanisation which is used in both upstream and downstream activities of the oil and gas (O&G) sector by leveraging on EMSB’s expertise from Taiwan. 

PGSB will set up a galvanising factory in Johor, which is targeted to be completed within one year. 

The capital expenditure is estimated to be RM25 million spanning financial year ending Feb 29, 2016 (FY16) and FY17. Its impact on gearing will be minimal, even with full debt financing. 

Earnings are expected to kick in by the third quarter of FY17 (3QFY17) at the earliest upon completion of the plant, but the amount of the contribution is uncertain pending more information from management. Hence, it has yet to be factored into our forecast.

Near-term outlook remains sluggish due to the challenging O&G industry amid uncertainties in crude oil prices. 

In view of maintaining plants’ utilisation rates, we believe the company will take on more orders to manufacture lower-margin products. Hence, we expect margins to remain weak in the coming quarters. 

Meanwhile, we expect the United Kingdom manufacturing division (Nautic Steels) to stay weak in the coming quarters since it mainly supplies to deep-water offshore players operating in the North Sea region, which is experiencing a massive slowdown. 

On a positive note, we expect the trading segment’s prospects to be better in the second half of FY16 (2HFY16) and FY17, underpinned by increasing pipes, valves, and fittings demand from the refinery and petrochemical integrated development (Rapid) project as the bulk of earlier works, which were mainly earthworks, have been completed. 

At the same time, we are guided that Pantech is likely to deliver its first Rapid-related orders worth US$12 million (RM53.16 million) in 2HFY16, with the company looking to secure more orders from the Rapid project. — Kenanga Research, Sept 30