This article first appeared in The Edge Financial Daily, on April 28, 2016.

Pantech Group Holdings Bhd
(April 27, 56.5 sen)
Maintain buy with a lower target price (TP) of 68 sen: Pantech Group Holdings Bhd’s fourth quarter ended Feb 29, 2016 net profit increased 4.3% year-on-year (y-o-y), but decreased 33% quarter-on-quarter (q-o-q) to RM7.4 million following a higher tax rate of 33.7% and lower revenue.

Quarterly revenue declined 16% y-o-y and 24% q-o-q to RM109.1 million, mainly due to lower sales from its trading division, having dropped to RM64.7 million after an initial order from the refinery and petrochemical integrated development (Rapid) in Pengerang, Johor, spiked up revenue in the previous quarter. Similarly, revenue from the manufacturing division decreased 23.8% y-o-y and 8.5% q-o-q to RM44.4 million.

For the financial year 2016 (FY16), net profit decreased 11.8% y-o-y to RM38 million while revenue shed 2.4% y-o-y to RM513.1 million. Twelve months’ revenue was within forecast after achieving 97% of our full-year forecast, but net profit fell short after reaching 80% of FY16 estimate.

FY16 revenue from local operations grew 1.7% y-o-y to RM535 million while exports decreased 39% y-o-y to RM57.1 million due to lower overseas demand.

Pantech declared an interim dividend of 0.5 sen, taking total FY16 dividend to 2.1 sen (versus 3.76 sen in FY15). This translates into a yield of 3.7%. The FY16 payout ratio was reduced to 34% (from 40% to 50% in previous years) due to uncertain market conditions and the company’s investment into a new galvanising plant in FY17.

Earlier this year, Pantech formed a 51:49 joint-venture (JV) company to venture into the hot-dip galvanising business. The JV company will invest RM30 million to build a new factory by end-FY17. Pantech will benefit from the JV as it can stop outsourcing the galvanising of its pipes, valves and fittings products.

Pantech’s 12-month earnings came below expectations, and we lower our FY17 sales and earnings per share (EPS) forecasts by 7% and 18% respectively to account for higher tax rate and slower global sales while domestic sales are expected to be supported by Rapid going forward. We maintain our “buy” call with a lower TP of 68 sen (previously 80 sen). Our TP is based on FY17 EPS forecast and average price-earnings ratio of 10 times for local steel and pipe companies. —JF Apex Securities Bhd, April 27