Pantech: Manufacturing Beats Trading

Pantech just released its FY14Q1 results (ended 31 May 2013) 2 days ago. There is no major surprise in its top and bottom lines, but the results are mainly within expectation.

Both revenue and net profit grow 12% and 10% respectively YoY, and 4% and 9% QoQ. It looks like a good result but surprisingly most investors do not seem to view it positively. Pantech's share price drops after the announcement.

If you look into the business segments of Pantech, you will find something interesting. For the first time, its revenue and profit from manufacturing division are more than the trading division. In FY2012, trading division still contributes 71% of the total revenue.

For FY13Q4 ended Feb 2013, Pantech's revenue and net profit from its trading arm is RM90.7mil & RM65.5mil, while its net profit stands at RM12.4mil & RM7.6mil respectively. For the following quarter FY14Q1 ended May 2013, revenue from trading drops 11% to RM85.3mil, while its net profit drops 28% to RM8.9mil.

For its manufacturing arm during the same period, the revenue rises 40% to RM91.6mil and net profit rises even more at 66% to RM12.6mil. Both figures have beaten trading arm convincingly.

What do all these mean?

The significant reduction of its trading business throughout FY2013 may be a worrying part, but I think the uncertainty of general election may make up a big part of the reason, especially during the Mac-May 2013 period when the election day is confirmed. The slow down in trading business is mainly due to lower demand (GE13?) and some margin pressure.

In contrary, Pantech's manufacturing arm has achieved an unexpected  jump in its business due to higher demand. I think the election issue may not affect its manufacturing division much as most of the products are exported???

After the election cloud has cleared, I predict that Pantech may play catch up in its trading business as many new projects are being awarded by the government in the O&G field, while its manufacturing business may continue to grow.

Of course this is only my assumption and it could be totally wrong. If it is true, Pantech may produce a positive surprise in the subsequent quarterly result.

At the same time Pantech also announced "double interim dividend" for FY13 & FY14 with 1.2sen each. This makes the total dividend 4.6sen for the FY2013, which represents an at least 6.6% yield at share price of 70sen (Pantech share price is between 50-70sen during FY2013). 

The 1.2sen for its first interim dividend in FY2014 is 20% more than the previous correspondent period. If this trend continues, Pantech may pay up to 5.5sen for FY2014, which translates into 5% yield at the share price of RM1.08. This is not bad for a growing company.

O&G industry is currently quite hot. How much will the impending termination of QE affect it?

Gtronic: Eyes On FY13Q2

In every hand held mobile device (smartphone/tablet) that you use, there is probably one or two electronic components inside it which is manufactured by Globetronics. This is what the CEO said.

Since founded in year 1991, Globetronics has been making profit every year, though its profit fluctuates according to global economy trend.

The exciting part is, throughout the years, Globetronic has successfully diversified its business from integrated circuits service/products to include timing & quartz crystal devices, LED, proximity sensor and others.

Globetronics proximity sensor which is its latest addition, started production in Q2 2012 with 4 mil units per month in April 2012. Currently the production has increased significantly to 20 mil units per month in May 2013. The proximity sensor contributes 7% of total revenue in 2012 but in Q1 2013, it has reached 21% of total revenue for that quarter. It is estimated that this percentage will stay the same for the whole FY2013.

The proximity sensor has received 10 years tax-exempt status (starting July 2012). It is also given "Direct Domestic Investment" grant by MIDA/MITI. The grant is estimated to contribute RM5-6 million per year to its bottomline over FY13-15. Besides the current Swiss customer, the proximity sensor is awaiting qualification by a US based customer.

Besides the proximity sensor, the production of its temperature compensation frequency device has increased from 4 mil units per month in Jan 2013 to 8 mil per month in May 2013, as it is now being built into a popular Korea based smartphone.

While its integrated circuit business remain flat, Globetronics's timing device & LED are believed to enjoy increasing demand from its old and new customers. The timing device is still the group's major revenue contributor with almost 33% of FY12 total revenue. It is producing about 120 million units of timing device per month.

According to Affin research, new product optical lense which can be used in camera flash component in smartphone, will be rolled out by Q3 2013. HwangDBS Vickers reported that Globetronics latest product in 2013 is optical interface sensors which is currently in negotiation with a Japanese customer.

Globetronics gives attractive dividend. It has a dividend payout policy of minimum 50% of net profit. It paid 64% and 54% for 2011 and 2012 respectively. It cleared all its debt in early 2012 and is currently debt free with RM109 million of cash at the end of Q1 2013 (ended 31st March 2013).

Apart from the organic growth, Globetronics does not rule out acquisition of oversea companies that complement its business in the future. Its management has hinted that it has been studying a few acquisition targets and hope to finalize one acquisition within the next 1 year.

Globetronics looks like a good company which is worth to invest in for mid term. It has great balance sheet, strong management team, good growth prospect especially with the popularity of hand held mobile devices, and it pays good dividend too. The question is at the share price of RM2.40-2.45, how far the share price go from here?

	TP
Hwang	3.00
Affin	2.83
RHB	2.76

Globetronics will release its Q2 2013 result soon, will the target price be revised upwards or downwards? I believe that it will post a strong result. 

Globetronics and Inari, which is better?

Jelas & LekaS: The Plan Still On?

Besides the West Coast Expressway (Taiping-Banting) in which the concession agreement has been signed, there are 2 other proposed expressways in the northern region, which are the Jelas & LekaS. Both seem to be still under planning stage.

Jelapang-Selama-Batu Kawan Expressway (Jelas), as its name suggests, connects Ipoh (Jelapang) to Penang (Batu Kawan). 

Jelas connects small towns along the way, and will be linked to North-South highway (PLUS) at Jelapang & Batu Kawan, linked to LekaS at Selama and Penang 2nd bridge at Batu Kawan.

       The proposed route map of Jelas

One of the interchange of Jelas is Lima Kongsi, which is near Valdor & Sg Bakap of Seberang Perai Selatan. Asas Dunia has a lot of land in this area, while Tambun Indah's Bandar Tasek Mutiara is also not far away.

       Possible Jelas route at Lima Kongsi interchange

Lebuhraya Kulim Selatan (LekaS), not Kajang/Seremban highway, connects Sungai Petani, Kulim and Bandar Baharu. It is linked to PLUS at both ends, which are Sg Petani & Bandar Baharu. It is also linked to Butterworth-Kulim Expressway (BKE) at Kulim.

       LekaS propsed route

Jelas is a 6-lane 116km highway with 2km tunnel and provides an alternative route between Penang and Ipoh. I wonder how many motorists would like to exit PLUS highway at Batu Kawan, pay the tol 2 extra times to use Jelas to Ipoh and vice versa. From the map, the distance of Plus & Jelas between Penang & Ipoh is almost the same. Of course unless the tol rate of Jelas is significantly cheaper or during peak season, perhaps Jelas may face low traffic problem.

The project of Jelas & LekaS are given to a same company Beta Mutiara Corporation Berhad under the "build-operate-transfer" scheme. As long as the tol rate is acceptable, the construction of these two expressways should benefit the people.

Inari: To Grow With Smartphones

In the battle of smartphone market share, it seems like Samsung has beaten Apple. Samsung sold 64.5 million smartphones in fourth quarter of 2012, compared to Apple's 43.5 million.

No matter who wins, it doesn't matter for Avago Technologies.

Avago is a US & Singapore based semiconductor company. It has 3 major business segment which are wireless communication, wired infrastructure & industrial. The wireless segment contributes almost half of its business.

Inari Amertron, based in Penang, is one of the contract manufacturers of Avago. Before the acquisition of Ceedtec & Amertron, more than 95% of Inari's revenue comes from manufacturing wireless chips for Avago who is also a major shareholder in Inari. After the acquisition, although the immediate revenue contribution from Avago is likely to be about 40%, but it is believed that it will still contribute more than 60% of Inari's profit.

Avago, who is a world leader in radio frequency wireless technology,  has both Apple & Samsung as its major customers. The popularity of smartphones has pushed up Avago and also Inari's business. As both Apple & Samsung are the most popular brands in smartphones & tablets, no matter who win, Avago will always be a winner as long as the demand of smartphone & tablet is still there.

In early 2013, after a slow first quarter, Avago did warn that the contribution of its wireless segment may slow down in Q2 mainly due to product transition of Apple. True enough, its Q2 (ended 5th May 2013) wireless segment revenue is 5-6% lower compared to Q1, but still stays at the upper end of company's guidance.

However, Avago, who supplies wireless chips in both  iPhone 5 and Galaxy S4, foresees a much better 2nd half of 2013, lifted by the pending launch of Apple's new iPhone (5s/6?) which is believed to be in September this year. 

Furthermore, there will be more network operators deploying high speed wireless technology 4G-LTE (long term evolution). This will certainly increase the numbers and quality of RF chips in a phone. The global LTE market is expected to almost double in year 2013 surpassing USD10 billion according to Infonetics Research.

All these development will surely boost RF chips makers like Avago, who has the winning edge because of its FBAR filter technology. However, will Inari benefit from all these as well? Does Inari manufacture the RF chips in both iPhone & Galaxy S, or just one of them? 

Almost in tandem with Avago, Inari's revenue and profit for its Q3 (ended Mac 2013) are lower compared to Q2 (Inari Q3's net profit includes tax gain of RM4.1 million). With Avago's gloomy guidance for its own quarter ended 5th May 2013, it is expected that Inari will post a "so-so" Q4 result, though the YoY surge in both revenue and net profit is still remarkable.

With brighter future ahead for Avago, especially with the to-be-launched-soon new iPhone, will Inari ride the trend as well?

No matter what, backed by world leader in RF technology with its FBAR filter, Inari is certainly well positioned to benefit from the boom of mobile electronics devices.

Pantech: Riding On O&G

Pantech Group was initially a trading company established in the 1980s which trades steel related pipes, fittings & flow control parts. It started its manufacturing activity by producing its own steel-related products since year 2000.

Trading has been Pantech's major revenue contributor until today. In 2008, about 80% of Pantech's sales are from trading more than 22,000 items which made up of pipes, fittings & flow control solution (PFF). However for the past 5 years, the management has expanded its manufacturing arm quite successfully. Now the sales from trading : manufacturing has been narrowed to 60:40.

Since 2008, besides increasing the capacity of its existing factory in Klang which produce carbon steel, Pantech has set up new factory in Pasir Gudang for stainless steel production. In March 2012, Pantech successfully acquired 100% of Nautic Group in UK, which produces Copper Nickel, Nickel Alloy & niche products in oil & gas industry.

In the latest FY2013 which ended in Feb 2013, Pantech's revenue has increased 47% from RM434mil to RM637mil, while its net profit surged 61% from RM34mil to RM55mil. This is largely contributed by robust growth in the oil & gas industry worldwide, as 80% of Pantech's revenue comes from O&G field.

Its recently acquired Nautic Group is expected to contribute only about RM50mil revenue & RM5mil net profit to the group at initial stage, while its stainless steel factory has just break even in this FY (it reported a loss of RM7.5mil in FY2012).

The production facility of Carbon steel in Klang has achieved a max of 18,000MT/annum and is 100% utilized. Its Pasir Gudang plant (14,400MT/annum) and UK plant are also 90% utilized. Nevertheless, Pasir Gudang's plant is running at 12-hour shift a day and still has room to increase its capacity. Pantech is also buying a factory nearby its current UK facility to expand its production and warehouse.       

Though the potential increase in manufacturing output is not very huge, especially with the slow down in stainless steel products order because of high nickel price, Pantech is still tipped to continue its growth amid the robust activity in oil and gas industry.

Petronas will allocate RM300bil in O&G capex within 2011-2015. Globally, Pantech has gained priceless network connection through the acquisition of Nautic Group. It has further its reach to Europe, Middle East, North & South America especially Saudi & Brazil where the O&G sector is hot.

Recently Pantech announced that US has voted to continue with the anti-dumping suit on welded stainless steel pipes from Malaysia, Thailand and Vietnam. However, the negative effect is largely neglected as it will only contribute to 3% of total revenue in FY2014. Pantech said that it will increase the production of stainless steel fitting by 3x to offset the fall in stainless steel pipes.

Though the future growth rate may slow down (compared to FY2012-13) due to its almost fully utilized manufacturing capacity, the trading arm may still continue to grow due to high demand in O&G sector.

       PFF solution

Due to its recent expansion and acquisition, Pantech has accumulated debt to RM250mil while its cash drops to RM79mil. The net debt/equity ratio stands as 0.45 which is still within the acceptable range. It still manage to pay out 40-45% of its earning as dividend for the past 2 financial years.

Pantech can now starts to enjoy the fruit from its Pasir Gudang & UK plants. Its management plans to grow its revenue to RM1billion mark by year 2015. It may be difficult but not impossible to achieve as long as the global economy is slowly improving and the O&G sector continue to grow.