Pantech Group Holdings - Value in growth prospects (Reinitiating Coverage)

Price: RM0.95

Target Price: RM1.22

Recommendation: BUY



· At least RM65.1b worth of domestic downstream projects in the pipeline. Assuming 5% of project values go to pipes, fittings and flanges (PFF), c.RM3.3b worth of projects to tender for going forth. These estimates are extremely conservative as there are also potential projects from other markets (eg. Singapore, European Union).

· Enhanced earnings from new manufacturing division. The new stainless steel and alloy products will be manufactured by its new subsidiary Pantech Stainless & Alloy Industries S/B, in Pasir Gudang. The new products are guided for roll out by 2HFY11 and generate at least RM100m of top-line revenue in a full year. We have not incorporated these earnings into our current forecasts.

· Saudi Arabian tie-up, access to world's largest net oil exporter. Should it be successful, a joint venture (JV) will earn it access to supplying Saudi Aramco. Prospects are some upstream investment of around USD23b and downstream investment of around USD11b-USD12. We have not incorporated any of such forecasts into our earnings.

· Positive on European Union (EU) anti-dumping ban lift. For the present year, Pantech is allowed to ship to the EU without having to pay anti-dumping duties. Since the lift in August 2009, a total RM1m worth of fittings have been shipped to the EU. Should they achieve total lifting the EU will be a significant market going forth.

· FY11 a better year. Minimal trading division revenue growth in FY10, with 10% growth in FY11 assuming contracts awarded in 2010 commences work. For the manufacturing division we forecast 65% utilisation rate in FY10, with improvement to 85% in FY11 due to increasing exports to the USA and the EU markets. We have assumed FY09 operating margin of 18% for trading division and 13% for the manufacturing division going forward.

· Re-initiate coverage with a BUY call at target price of RM1.22 based on FY11 basic EPS of 17.5sen and 7x PER. We see value in their new manufacturing capacity, earnings growth from the EU market expansion, and potential Saudi Arabian tie-up. The stock is trading at attractive valuations of 5.8x PER for FY11, a significant discount to its oil and gas peers.