• Business profile. In general, the businesses of Pantech (listed in Feb 97) is conducted via three core divisions:

1. Trading Division (contributed 57% and 73% to 1HFY18 topline and PBT) focuses on trading, supply, and stocking of high pressure seamless and specialised steel pipes, valves and fittings (PVF) and other fluid transmission related products for use in the oil and gas, gas reticulation, marine, onshore and offshore heavy engineering, power generation, petrochemicals, palm oil refining, and other related industries, predominantly in Malaysia. The 30,000 plus stock keeping units (SKU) in inventory are warehoused in five facilities in two countries, Malaysia and Singapore. In addition to sales from new projects, the company enjoys repeat orders for regular maintenance undertaken by its existing clientele, which provides a steady stream of business and typically accounts for about 30-40% of Pantech's annual sales.

2. Manufacturing division (contributed 43% and 27% to 1HFY18 topline and PBT). This division produces and supplies pipes and fittings of various sizes and specifications that comply with different international standards. The products are made of materials such as carbon steel, stainless steel, copper nickel, nickel alloys, duplex and other alloys. Pantech Group’s manufacturing division also produces stainless steel and alloy pipes, and customised high frequency induction long bends. Products manufactured are mainly sold internationally.

3. Hot-dip Galvanising division (likely to breakeven by FY19) in Tanjung Langsat, Johor. Pantech entered into a 51:49 JV with Euromech Machinery Sdn Bhd to establish Pantech Galvanising Sdn Bhd (PGSB). PGSB commenced operations as planned in Dec 2016 and have the largest hot-dip galvanising facility in the Southern part of Peninsular Malaysia with a planned capacity of 48k MT per annum. Output is picking up pace and is anticipated to achieve 50% capacity at the end of FY2018.

• Brighter days ahead amid rising oil prices and RAPID contracts . In its 2QFY18 results review, Management remains cautiously optimistic on the increased activities and development in oil and gas industries in tandem with the recovery in oil prices above US$65/barrel. Meanwhile, the shale gas interest in the US has spurred increases in sales activities for the manufacturing division. Given its dominant local market share of PVF as well as its move to set up a warehouse in Pengerang and a galvanising plant in Tanjung Langsat, we believe Pantech is well-positioned to benefit from more RAPID orders, given the continuous development of RAPID projects and associated facilities in southern Johor.

• Poised for a triangle breakout? According to consensus, Pantech is trading at undemanding 10x FY18 P/E (slightly below its 10-year average 11x), supported by 38% earnings CAGR from FY17-19 and 3.8-4.5% DY for FY18-19. Technically, the correction from RM0.74 (25 Oct high) to a low of RM0.61 (8 Dec) may have bottomed out. With the candles bounced off its 61.8% FR (RM0.62) and the key 10/20/30/50/200D SMAs, we believe a new up leg will take place soon, pending a triangle breakout.

• A decisive breakout above RM0.67 (downtrend line) will spur prices higher towards RM0.70 and RM0.74 before heading towards our LT objective at RM0.78 (upper channel). Conversely, failure to hold at supports near RM0.63 (200d SMA) and RM0.62 may indicate weakness in the share price below RM0.555-0.59. Cut-loss at RM0.605.

Source: Hong Leong Investment Bank Research - 10 Jan 2018