The 9M17 results is deemed within expectations as we expect a stronger 4Q17 driven by stronger demand in overall PVF demand and sustained manufacturing margins in view of better plant utilization. Meanwhile, PANTECH recently commenced operations of its galvanizing plant, slightly ahead of schedule. All in, we make no changes to our current forecasts and retain UNDERPERFORM call with unchanged TP of RM0.42 peg to 0.6x FY16E PBV.

Deemed within expectations. The 9M17 set of results is deemed within expectations with core net earnings of RM19.6m, accounting for 65% and 59% of our and market consensus’ full-year estimates, respectively, as we expect a much stronger 4Q17 arising from a pick-up in PVF demand. A 3rd interim NDPS of 0.3 sen was declared in 3Q17, which is lower than the 5.0 sen in 3Q16, but is within our expectation.

Stronger QoQ but weaker YoY performance. 3Q17 core net profit improved by 24% QoQ to RM6.4m, despite a 5% dip in revenue, thanks to improvement in margins from both trading and manufacturing segments (10.5% in 3Q17 vs. 7.8% in 2Q16) driven by better product mix. Furthermore, the slight QoQ increase in manufacturing segment underpinned by improving plant utilisation also helped to mask revenue weakness in trading segment. YoY, 3Q17 core earnings plunged 38%, in tandem with 31% drop in overall revenue largely attributable to lower manufacturing output as a result of weaker global demand. Cumulatively, 9M17 earnings fell 36% YoY to RM19.6m as a result of above-mentioned reasons coupled with weakening margins (EBIT margin of 9.3% in 9M17 vs 12.0% in 9M16).

Targeting RM100m order from RAPID in FY17. As evident by its QoQ improvement in manufacturing segment, we expect more orders coming from Pengerang site development. Furthermore, we gather that there are improvements in utilisation for both its stainless steel and carbon steel plants. However, its UK manufacturing division (Nautic Steels) is likely to stay flattish at breakeven level this year as offshore activities remain muted.

Galvanising plant already in operation. PANTECH has recently completed and commenced operation of its 51%-owned galvanising factory, a month ahead of its original schedule. PANTECH is targeting to utilise 50% of its 48,000mt capacity in FY18 but profitability could be lower due to initial start-up cost. This would serve an additional income stream for PANTECH whilst complementing its existing business without the need to outsource the PVF galvanising job. We estimated c.RM29m revenue contribution (6% of our FY18E top line forecast) at 50% utilisation.

Keep FY17-18E earnings. No changes to our FY17-18E earnings estimates as we expect a stronger 4Q17 driven by stronger demand in overall PVF demand and manufacturing margins to sustain in view of better plant utilisation.

Reiterate UNDERPERFORM. We maintain our UNDERPERFORM call on the stock with an unchanged target price of RM0.42, pegging to 0.6x FY18 PBV, in line with the current average sector valuation after taking into consideration the remaining unconverted warrants. Our TP has an implied CY17 PER of 11.6x, which conforms to higher PER range of 11x- 13x in 2008/09 when crude oil prices traded between USD36-80/barrel.

Risks to our call include: (i) stronger-than-expected performance of the trading division, (ii) higher-than-expected selling prices of pipe fittings & valves, and (iii) a pick-up in Pengerang development.

Source: Kenanga Research - 13 Jan 2017