While PANTECH’s 1Q19 CNP of RM14.1m (+26% QoQ; +1% YoY) came in within estimates, we are downgrading it to MARKET PERFORM with lower TP of RM0.610 (from RM0.750) as PANTECH has been subjected to an unwarranted 183% anti-dumping tax for its US exports on carbon welded butt fittings in which all its US shipments are currently being suspended and we expect this to negatively impact bottom-line by 15%/11% in FY19-20.

1Q19 within but missed dividends. 1Q19 core earnings of RM14.1m was within expectations, making up 27%/26% of our/consensus estimates. No dividends declared in 1Q19 (against 1.0 sen declared in 1Q18), missing our FY19 expectations of 2.5 sen.

Stronger QoQ and YoY. 1Q19 core earnings increased 26% QoQ backed by higher revenue (+19.3%) from both Trading and Manufacturing segments due to: (i) higher domestic demand for trading products, and (ii) higher contribution from galvanisation plant coupled with better overseas demand for manufacturing. YoY, core earnings only increased marginally (+1.1%) despite higher revenue (+17.7%) as explained above, owing to weaker net margin (-1.3ppt) from the poorer product mix.

Innocent victim of anti-dumping duties. Separately, PANTECH announced that the US Department of Commerce (DOC) has made preliminary claims that Malaysian companies (such as Pantech) import carbon butt weld fittings from China and subsequently export them to US, which circumvents around the existing US anti-dumping duties (of 182.9%) imposed on China. Consequently, the US DOC has imposed anti-dumping duties of 182.9% on all carbon steel butt welded fittings from Malaysia. As Pantech manufactures its own carbon pipe fittings and by no means is circumventing around these duties, they are currently taking legal steps to reverse the duties imposed on them citing that their products are ‘Made in Malaysia’ and not China.

Negatively hit. Currently, PANTECH has suspended all shipments of carbon steel butt weld fittings to the US. We are negative on this given that 70% of PANTECH’s manufactured carbon butt weld fittings are exported to the US (c.RM120-150m in revenue/annum) which would subsequently hurt bottom line. We decide to account for the worst by reducing FY19-20E manufacturing utilization rates for carbon welded butt fittings to 40-60% (from 90% previously) to cater for nil US exports (till mid CY20) leading to a 15-11% reduction to our estimates.

Downgrade to MARKET PERFORM (from OP) with a lower TP of RM0.610 (from RM0.750) after pegging valuations lower to FY19E PBV of 0.85x @ 5-year -1SD (from 1.0x @ average). We downgrade our valuations in light of the uncertainties arising over the anti-dumping duties with expectations that it will persist for a year (till mid CY20) before being alleviated. While we are expecting its share price to succumb to short-term selling pressures, we believe our MP rating is fair given: (i) better oil and gas activities amidst the healthier oil prices on higher maintenance works, which indirectly benefit PANTECH, and (ii) on-going RM40m capex expansion, which would boost its carbon steel production capacity and warehousing facilities to be reflected in FY20E earnings. We see the RM0.45 level (implying 9.0x PER or - 1.5SD) as a strong support level.

Risks to our call include: (i) weaker-than-expected performance of the trading division, and (ii) lower-than-expected selling prices of pipe fittings & valves.

Source: Kenanga Research - 27 Jul 2018