Pantech recorded commendable FY19 earnings of RM47.1m (-0.2% YoY) despite being slapped with US anti-dumping duties since July 2018. We like the stock driven by potential earnings recovery, underpinned by a likely U.S. shipment suspension uplift, and increased local offshore fabrication activities. Valuations are cheap at 8.3x FY20 P/E (33% below peer) and 0.74x P/B (54% below peer), supported by a steady 10% FY19-21 earnings CAGR and 4.1% DY. Technically, the stock is poised for a positive Cup & handle pattern formation, which could drive share prices higher towards RM0.64-0.68 levels.

One-stop service centre to diversified industries. PANTECH is engaged primarily in (i) the trading of steel-related pipes, valves, fittings and flow control (PVF solutions) and (ii) the manufacture of butt-welded carbon steel, copper nickel & nickel alloy pipes & fittings. PANTECH attains product certification from different international bodies and enjoys strong relationships with oil majors like Qatar Petroleum, Kuwait Oil Company, Petronas, BP, Esso, Shell and the Brazilian Navy. PANTECH’s products are supplied mainly to O&G (60-70%) and palm oil sector c.15-20%.Meanwhile, Pantech also enjoys repeat orders for regular maintenance undertaken by its existing clientele. Indeed, demand from maintenance contracts provides a steady stream of business and typically accounts for up to 40% of PANTECH’s annual sales.

A commendable FY19 results despite US anti-dumping duties. PANTECH’s FY19 net profit was flattish YoY at RM47m, in spite of a 7-month suspension of carbon steel (CS) exports to US. To recap, in Jul-18, the US Department of Commerce (DoC) preliminarily determined that Malaysian companies are circumventing the 182.9% anti-dumping duties (AD) order on butt-weld fittings from China. Since then, PANTECH temporarily suspended shipments of CS fittings (diameter less than 14 inches) to US.

Decent trading division offset softer manufacturing division. PANTECH’s resilience was mainly anchored by the trading division, which benefited from increased demand and delivery in local O&G projects. Additionally, better product mix boosted contribution from this segment, offsetting the weak manufacturing division due to suspension of carbon steel shipments to the US. The Group declared a 4Q19 one sen final dividend, which brings FY19 total DPS to 2 sen (FY18: 2.5 sen). As at FY19, the trading (+11% to RM387m; PBT margin 13.1%) and manufacturing divisions (-17% to RM222m; PBT margin 6.8%) accounted for 64% and 36% to FY19 revenue of RM609m, respectively.

Expect a steady 10% earnings growth for FY19-21. Following a flattish FY19 earnings, consensus is anticipating a 10% FY19-21 earnings CAGR, driven by potential earnings visibility restoration story, underpinned by a likely US shipment suspension uplift, and increased local offshore fabrication activities. We do not rule out the possibility that an uplift of the shipment suspension moving forward which will contribute to PANTECH’s earnings in the future.

Beneficiary of Petronas upstream capex. Meanwhile, PANTECH is also likely to benefit from Petronas’ increased upstream capex of approximately RM30bn for 2019 to develop oil and gas new fields, where PANTECH’s products are also used in engineering and construction (E&C) phases of the fields (e.g. used as topside structures and jackets, subsea platform pillars, etc).

Potential cup & handle pattern formation. The Cup and Handle is a bullish continuation pattern that marks a consolidation period followed by a breakout that turns from a bearish bias to a bullish bias. We opine that PANTECH is in the midst of staging a Cup and Handle pattern breakout as share price is closing above all the key SMAs, supported by upticks in indicators. A decisive breakout above the downtrend line near RM0.59 would put the share prices on course for a retest of the RM0.615 (14 Mar high) and RM0.64 (22 Mar high) levels before advancing to our LT objective at RM0.68. Key supports are RM0.56 (lower Bollinger band) and RM0.55 (50D SMA). Cut loss at RM0.535.

Source: Hong Leong Investment Bank Research - 29 Apr 2019