PANTECH posted an expectedly weaker set of results, dragged by shipment suspension of carbon steel to the U.S. We understand that the DOC is expected to arrive to a final decision on the matter by Feb-2019, which may lead to an earnings upgrade of c.5-10% for FY20E should the outcome be favourable. Upgrade to OP, with TP of RM0.61, as we view recent share price weakness could have more than factored in foreseeable negatives.

1H19 deemed broadly within expectations. 1H19 net profit of RM25.0m came in at 58% and 56% of ours and consensus full year’s earnings forecasts, respectively. Nonetheless, we deem this to be broadly in-line of expectations, in anticipation of a weaker 2H19 due to the suspension of shipments of carbon steel butt-weld fittings to the U.S. following a preliminary affirmative anti-circumvention determination issued by the U.S. Department of Commerce (DOC) in July-2018. However, announced dividend per share of 0.5 sen for 1H19 missed expectations, versus our full-year forecast of 2.1 sen and 1H18 of 1.5 sen.

Expectedly weaker results. 1H19 net profit dipped 3% on the back of (i) weaker manufacturing segment (-5%), masking (ii) improved trading segment (+12%) due to increased delivery to local oil and gas projects. As for the individual quarter of 2Q19, net profit of RM10.9m was lower by 8% YoY due mainly to the poorer manufacturing segment (-26%) offset by the improved trading business (+21%). Similarly for the QoQ- basis, results were poorer by 23%, dragged loss of manufacturing profits by 42% coupled with slight dip in trading segment by 2%.

Poorer results due to suspension of shipments. Overall, this quarter’s poorer manufacturing segment was a direct result of the aforementioned suspension of shipments of carbon steel butt-welds fittings to the United States. As we understand, the DOC is scheduled to arrive in Malaysia for inspection purposes in Dec-2018, and is expected to arrive to a final decision on the matter by Feb-2019. We opine that should PANTECH land a favourable decision, we may potentially see an approximately c.5-10% earnings upgrade for FY20E.

Upgrade to OUTPERFORM. With no changes made to our FY19-20E earnings, our TP is also left unchanged at RM0.61, pegged to 0.8x PBV on FY19E at -1SD from the average of 1x PBV. However, our call is upgraded to OUTPERFORM (from MARKET PERFORM previously), as we view current levels to have more than priced-in foreseeable negatives following recent share price weakness. At this level, the stock also offers decent dividend yields of 3-5%.

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 - 25 Oct 2018