Thursday, October 18, 2012

Pantech- poised to move higher?

Background

Pantech Group Holdings Bhd ('Pantech') is involved in the manufacturing of stainless steel, carbon steel & duplex pipes and pipe fittings (such as valves, induction bends, forged flanges, etc) as well trading. Its products are intended mainly for the Oil & Gas sector.

Recent Financial Results

For QE31/8/2012, Pantech's net profit increased by 15% q-o-q or 98% y-o-y to RM14.3 million while its revenue increased by 13% q-o-q or 63% y-o-y to RM164 million. The improved performance was due to better demand from the O&G sector as well as better demand from overseas.


Table: Pantech's last 8 quarterly results


Chart 1: Pantech's last 21 quarterly results

Financial Position

Pantech's financial position is deemed mixed. As at 31/8/2012, its current ratio stood at 1.9 times while its gearing ratio stood at an elevated 0.7 time. While current ratio is satisfactory, its inventory level appears high with inventory turnover of 162 days. Debtors' turnover is probably within industry's standard at 64 days.

Valuation

Pantech (closed at RM0.68 yesterday) is now trading at a PE of 6.4 times (based on last 4 quarters' EPS of 10.56 sen). At this PE multiple, Pantech is deemed inexpensive.

Technical Outlook

Pantech is trying to break above its intermediate downtrend line, RR or R1-R1. If this breakout is successful, the stock could rally to its strong horizontal resistance at RM0.75-0.80.
 
Chart 2: Pantech's weekly chart as at Oct 17, 2012 (Source: Tradesignum) 

Conclusion

Based on good financial performance, inexpensive valuation & potentially bullish technical outlook, Pantech could be a good stock for medium-term investment. However, the company's financial position is mixed and the company needs to address its high gearing as well as its high inventory. 

Note: 
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, Pantech.

5 comments:

BB said...

Alex, can you comment on Kian Joo please. Have a few lots and it seems to be drifting lower and lower.
Thanks.

K C said...

Alex, agree with you Pantech did well in its latest financial performance. However is gearing of 0.7 and days inventories turnover high? I don't think so. A gearing of 0.7 is still way below 1.0, a normally accepted ratio. Actually it more depends on whether the earnings, or rather the cash flows is adequate to meet the interest payment. Earnings is 5.3 times interest, and just two quarters of CFFO is already 6 times interest payment. For Pantech, more debt is better as it is cheaper than cost of equity. Its inventories turnover of 160 days is the normal figure as the past years, even though its turnover has increased tremendously. What is the problem?

Alex Lu said...

Hi BB

I have not much to say about Kian Joo. It is resting on its 20-week EMA line at RM2.34. Its next support is the horizontal line at RM2.25.

Being a producer of packaging products (such as cans & corrugated carton boxes), it should move in tandem with consumer sector which is on the uptrend.

As such, I am positive on the stock. The current weakness could be a good opportunity to get into the stock.

Alex Lu said...

Hi KC,

What's the problem? Looking at financial position gives you a sense of how much room a company has to maneuver in the event of unexpected downturn. A company with poor financial position may survive a downturn if it executes well and can avoid potholes. When we look at a stock, we do not know how well its management executes and we don't know whether the company will be hit in a downturn.

For your information, the top two stocks in the Oil & gas sector has the following ratios:

1. Dialog
Current Ratio: 2.1 times
Gearing Ratio: 0.26 time

2. Sapurakencana
Current Ratio: 1.1 times
Gearing Ratio: 0.83 time

Pantech is in between these two companies. So, if you say that Pantech's gearing is not a problem, you could be right. Is it elevated? To me, it is. Am I worried? A bit but not enough to say AVOID this stock. In fact, I highlighted the stock as a possible good stock for investment.

CM Lo said...

What is the Picorp debt level?