Saturday, February 6, 2010

Testing time

Just got back to the country .... a lot interesting stuffs going on this week. Not going repeat them here as I'm the laggard while most of you already know everything. My trip was too exhausting, I felt asleep every night in less than counts of three.

Nevertheless, the big worthy news out there that I need to briefly mention is from what I read in old papers on the plane were

(i) markets were busy pricing in potential exit strategy by ECB and demand of fiscal discipline by Trichet's hawkish remarks to bring down country deficits plus potential defaults and etc( old news actually)

(ii) initial claims for unemployment insurance went up but quickly reversed by good news on unemployment fell below 9.7%.

With S&P down closed to 10% completes the definition of a correction, I think we are about there to buy something. Stock picking and discipline are key.

Emerging markets are still vulnerable to corrections as valuations are still expensive, even though it has higher growth potential. I find it difficult to find undervalued stocks after the sharp price runs up. I have to pass most of the companies that I looked at lately. The closest was Pantech but I still have to wait for the price to come down. Since price is what we paid and value is what we get, here is what I think about Pantech. RM 0.90 (fair price, little upside), RM 0.70 (trading buy), RM 0.60 (strong buy), RM 0.40 – RM 0.50(close my eyes and buy).

Pantech main businesses are (1) Trading of pipes, fitting and flow controls (2) Manufacturing of pipe fitting. Trading part of the business contributes more than 80% of the revenue, the other 17% is from manufacturing. Trading margin is lucrative 17%, manufacturing is fair 14% despite of higher depreciation of 10%. Manufacturing results should get better as more orders flow in.

I misunderstood their business at first glance, thinking they are in hardware store business. You know-lar, those PVC toilet fitting and etc. No, they are supplying stuffs to O&G and petrochemical industry which require stringent quality. This translates into consistently high ROE above 20% but they use quite bit debt financing their working capital.

What strikes me was they ventured into high yield and “exotic pipe” driven by high pressure and increased corrosives requirements. I read this as more and more ventures going into deep water. If we believe the theory of the end of cheap oil, Pantech will fit well into next wave of deep water oil exploration. This has kept their revenue from falling off the cliff in FY 2009 when crude oil tumbled that caused many companies canceling/freezing projects. They are well position as they are very close to their customers in Miri, Bintulu, Kikeh, Brunei and etc.

The other attraction point is their manufacturing arm Pantech Steel expanding their overseas presence. Currently, 80% of their products(butt welded fitting is the major) to US, Canada, South America(Mexico, Venezuela), Europe and ASEAN(Vietnam Indonesia, Brunei). They are also going after almost all major oil producer countries like UEA, Kazakhstan, India, etc.

Depending on which angles we look at it, resilient sometimes mean hanging tough out there, not necessary new records of revenue or profit. Pantech revenue is expected to drop around 10% and 20% declined in net profit. EPS will likely to come in around 0.135/share FY 10, at 0.94, the company is selling around 7 times. Though exploration activities should pick up soon, for EPS to go back between 0.16 to .23 will be tough for FY 11. So growth may not come in fast enough, the only way is to wait for Mr. Market to miscalculate and dump shares.

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