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Wednesday, January 9, 2013

PANTECH (FV RM1.00 – BUY) Bright Prospects For 2013

Fair Value : MYR 1.00 
 
We  continue  to  like  Pantech  as  a  niche  steel  player  leveraging  on  the  positive outlook for the O&G sector. Nautic Steel should remain the company’s main growth driver, while its stainless steel  unit is poised to turn around in FY14. These should propel Pantech’s earnings higher.  On  incorporating  the  potential  dilution  from  full conversion  of  its  irredeemable  convertible  unsecured  loan  stocks  (ICULS),  we derive a new FV of RM1.00, pegged to a higher PER of 9x FY14F, vs 6x previously.  Maintain BUY.

Capitalising on O&G boom. OSK remains upbeat on the O&G sector, which is expected to see heightening activities in 2013 amid stable oil prices. As a one-stop provider of pipes, fittings and flow controls (PFFs), Pantech is well-positioned to ride on this O&G boom. The company’s strength as an alternative player puts it in a sweet spot despite the headwinds facing the steel industry.

Growth  nodes  intact;  2H  looks  good.  Pantech’s expansion plans for Nautic Steel are progressing  well,  while  its  loss-making  stainless  steel  division  is  recovering  and  is expected to break even by end-FY13. Going into FY14, we expect to see Nautic Steel and its stainless steel division strengthen further. We think the company will continue to report good  2HFY13  earnings,  in  line  with  our  forecasts.  Furthermore,  Pantech  may  offer investors  a  decent  dividend  yield  of  6.6%  for  FY13,  assuming  a  40%  payout  ratio  at  the current share price of RM0.72.

Model under review, but still a BUY. We are reviewing our valuation model and adjusting the company’s share base, assuming that all its irredeemable convertible unsecured loan stock (ICULS) would have been converted into Pantech shares. However, we have yet to adjust for its warrants as these are long dated and out-of-the-money. As such, the stock’s EPS  for  FY14f  will be  diluted to  11.1 sen from  13.5  sen previously. We  are  now  pegging Pantech’s valuation at 9x FY14f  PE  instead  of  6x  PE,  after  excluding  the  dilution  impact from our valuation parameters. Hence, our new FV is RM1.00. Reiterate BUY.

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