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Pantech (5125) is a industrial sector company listed in main market of Bursa. Its business is supply of pipes, valves and fittings (PVP) for industrial use. Although it is not a oil and gas stock, its business performance is closely related to oil and gas sector. Pantech is very generous in distributing its profit as dividend to shareholders. Being in a cyclic industry, amount of its dividend every year varies. If considering its current share price of RM0.67, and a total of 5.5 cent of dividend distributed in the past 4 quarters, its dividend yield is 8% ! It’s also worth mentioning that its quarterly profit has grown continuously for 7 quarters. Looking at these figures, Pantech looks attractive.
Background of Pantech
Pantech was initially formed in 1987, and listed in 2007, so it already has a long history being a listed company. Its market cap is not big, only around RM500 million. Pantech positions the company as one stop center for PVF, which stands for pipes, valves and fittings. Their products are particularly designed for industrial use, customers are coming from oil and gas industry, oleochemical industry etc.
How it is related to oil and gas industry
Although products of Pantech are not solely supplied to oil and gas customers only, in financial reportsmanagement always correlate their performance to the oil and gas sector. Its exposure to oil and gas sector is not disclosed by the company, but according to the information here, approximately 50% of its revenue comes from oil and gas sector.
Business segments
Pantech divides its business into two segments, trading and manufacturing.
Under manufacturing segment, Pantech manufactures standard and customized ranges of pipe and fittings of various materials. Trading division on the other hand, distributes PVF products from international vendors and also from their own manufacturing division.
Under manufacturing division, Pantech has four factories as listed below. Among the, PGSB is only to provide galvanizing and coating service, does not actually manufacture PVF products.
| Name | Pantech Steel Industries PSI | Pantech Stainless & Alloy Industries (PSA) | Pantech Galvanizing (PGSB) | Nautic Steels (NSL) |
| Products | carbon steel products | stainless steel products | Galvanizing and coating service | copper nickel alloy products |
| Capacity | 21000 tons | 18000 tons | 48000 tons | 800 tons |
| Location | Selangor, Malaysia | Pasir Gudang, Malaysia | Pasir Gudang, Malaysia | UK |
| Utilization in FY2022 | 90% | 90% | 75% | 70% |
Financial status
Cash position
I like to own dividend stocks with net cash position, however this is not the case for Pantech. Pantech is not a net cash company, but in my opinion its debt level is still within acceptable range. Referring to the quarterly report ending Aug 2022, Pantech owns RM200 million of cash and RM300 million of borrowings. Among the borrowings, majority (RM270million) is short term borrowing. Most likely, these short term borrowings are only temporary to manage short term liquidity, coming from increase in inventories and increase in receivables.
Credit risk
As mentioned above, Pantech has significant of short term borrowing. One of the reasons is increase in inventories to cope with market demand, which is understandable. But the other reason is what we should be cautious as an investor, which is significant increase in receivable.
From FY2022 annual report, it can be seen that receivable increased from RM105millino in FY2021 to RM 230 million in FY2022 ending February. Why we should concern about this? (1) RM140 million of receivable is overdue (2) RM110 million came from three major customers.
Coming to the latest quarterly report ending Aug 2022, receivable has slightly reduced to RM204 million, so it is good that it didn’t get worse but still is a point that I would monitor in the coming quarters.
Foreign currency risk
Pantech exports their products also, so there is a significant amount of sales in foreign currency, especially USD. Therefore the strong USD that the market is experiencing now, is good to Pantech.
Dividend payout
Pantech does not have a dividend policy in place, but it has been distributing dividend every year. Because it is supplying to cyclic industries, its dividend payout is also not very constant over the years. Below is record of Pantech’s dividend payout for the past few years. On average, I would say 40% of profit would be distributed as dividend.
- FY2017 – 42.5%
- FY2018 – 40.7%
- FY2019 – 31.5%
- FY2020 – 39.1%
- FY2021 – 65.4%
- FY2022 – 45.1%
Quarterly results (FY2023 Q2)
- Up to FY2023 Q2 ending Aug 2022, its revenue and profit after tax grew 90% and 100% respectively. Undoubtedly, good figures.
- Despite good figures in the income statement, Pantech has recorded negative operating cash flow, mainly because of increase in inventories and also the significant receivables. For the reasons already discussed above, if its operating cash flow does not turn positive in the next 1 to 2 quarters, then that could be very ad sign to inventors.
- Because of negative operating cash flow, the short term borrowings also increased significantly to meet operating needs.
- Looking at breakdown of its business, trading and manufacturing divisions each contributed around half of the revenue. But if read carefully, it can be found that compared to the same period last year
- Trading segment revenue increased by 72%, profit increased by 27%
- Manufacturing segment revenue increased by 108%, profit increased by 200%
- So it can be concluded that it is the manufacturing segment which pushed Pantech to achieve its record high profit. Although the reasons were not explained by the company, I have some guess. First all factories have their basis expenses regardless of order received. When the capacity of the factories is better utilized, the product margin will increase. Secondly, the products are made in Malaysia but some of them are exported in foreign currency, this could also boost the profit margin.
End
Because of the high oil price and high CPO price earlier this year, companies in these sectors have cash to plan for capex projects. These projects are beneficial to Pantech, but there is a lag effect because it takes time for projects to get approval to go ahead, design and only comes to procurement of materials. Although both the commodity prices has come down from their peak, I feel the lingering effect to Pantech would still stay for some time.
For disclosure in the annual report, it looks like capacity of the factories is more or less utilized now. So for Pantech to grow in the new few quarters, there is greater dependency on the external factors, such as favorable exchange rate and good product selling price because of market demand.
From both price valuation and dividend yield perspective, Pantech looks very attractive, the only concern is with its operating cash flow, which still needs to be monitored in the next few quarters. A final note, Pantech is operating in a cyclic environment, so it may not be a good candidate for long term investment, but its prospect looks like promising in short to medium term.
In case you want to know more about dividend investing, feel free to check out my article about ultimate guideline for dividend investing here.
Disclaimer: This article is purely my notes from studying this company. This is not a BUY or SELL call. I am not a registered investment advisor nor an investment guru, please be reminded to do your own homework and invest at your own risk.
