PANTECH (FV RM0.595 - TRADING BUY) Corporate News Flash: A Fitting Acquisition

Stock Name: PANTECH
Company Name: PANTECH GROUP HOLDINGS BHD

Research House: ECMLIBRA

Price Call: BUY

Target Price: 0.595

THE BUZZ

Pantech Holdings Group Bhd (Pantech) announced  yesterday that it entered into a SharePurchase Agreement (SPA) on 7 March 2012 to acquire 100% equity of UK-based nichemanufacturer and supplier of pipes, fittings, and flanges (PFF) Nautic Group,for a total consideration of GBP9.5m, or approximately RM45.5m.

OUR TAKE

Positive move.  We are positive on the acquisition in generalas it will widen the company's product range and client network. With thisacquisition, Pantech is expected to strengthen its  expertise in exotic products such  as  pipefittings and  flanges for sea watersystems and acidic environments which  are designed to operateunder highly corrosive conditions and extreme temperature. The acquisition willalso enable Pantech to  acquire the  technical knowhow  to manufacture  niche productsto  complement  itsexisting capability in  producing carbon steel fittings, andstainless steel pipes and fittings.

Opportunitiesabound  for  high value-added products. Over the past34 years, the Nautic Group has established a reputation as a reliablespecialist manufacturer of niche steel products comprising duplex and super duplex stainless steel, coppernickel and alloys.  The Group has  also attained  product certificationfrom different international bodies and enjoys strong  relationships with oilmajors like Qatar Petroleum, Kuwait Oil Company, Petronas, BP, Esso, Shell andthe Brazilian Navy. As such, Pantech will be able to leverage on the NauticGroup's network to market its existing products directly to the large oilplayers.

Founder stays onduring transition period. Pantech signed the SPA with the founder of NauticGroup, who  will be  required to stay on for a year to ensure a smooth post acquisition transition as part of the  agreement. Such  a condition  will help  shorten  the learning curve as well as thetime-to-market for Pantech's thrust into the stainless steel, copper nickel andalloy PFF markets.

Profit sharingand  EBITDA earnings guarantee. Apartfrom retaining the founder in the company for a  year, the agreement also  includes a clause stipulating  that under certain conditions, Pantech willshare a pre-determined amount of profit with the founder while the latter willprovide an earnings guarantee of GBP950,000 at the EBITDA level to Pantech. Wesee this as a win-win arrangement for both parties as Pantech can avoid thehassle of re-establishing the Nautic Group's operations, while the founder willensure that the transition is smooth and that the company continues to beprofitable.

Source: OSK188