Having suffered a lacklustre FY19, we see a potential restoration of earnings’ visibility in FY20, coming from: (i) possible uplift of U.S. shipment suspension by the DOC, with a 2H20 boost forming our base-case assumption, and (ii) sales from new fields E&C projects, capitalising on Petronas’ increased upstream capex. We increase our FY20E earnings by 7%, while keeping our FY19E numbers intact. Upgrade to OP with TP of RM0.69.

Positive outcome on U.S. shipment suspension? To recap, in July 2018, PANTECH suspended shipments of its 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). However, we gathered that the DOC has concluded their verifications on PANTECH in late-Feb. With the verifications completed smoothly, we feel that an uplift of the shipment suspension may be likely within the coming few months, after the DOC finalises its findings.

Possible beneficiary of local upstream capex. We believe PANTECH may stand as a “dark horse” beneficiary of Petronas’ increased upstream capex. Recall that Petronas had committed to an increased capex of >RM50b for 2019 (from RM47b in 2018), of which ~RM30b will be for upstream, after it focused much of previous years’ capex on downstream. We reckon the increased upstream capex will be invested on the development of oil and gas new fields. PANTECH provides pipes, valves and fittings not only used for the transportation of oil and gas, but also for the engineering and construction (E&C) phases of the fields (e.g. used as topside structures and jackets, subsea platform pillars, etc). Additionally, as we have gathered, PANTECH is also the only locally owned pipe supplying company under the “Petronas Framework Agreement”, thus potentially benefiting from local content requirements, should there be any such ruling.

Potential restoration of earnings. We believe the potential uplift of U.S. shipment suspension, coupled with orders from local projects may help to mitigate some earnings gap from the completed RAPID (estimated to have contributed approximately ~30-40% of FY18 earnings, and ~10% of FY19 earnings). Overall, we increased our FY20E earnings forecast by 7%, with a U.S. shipment suspension uplift in 2H20 forming our base-case assumption. Meanwhile, we kept our FY19 forecasts unchanged as we feel that our numbers are still intact (expect full-year results’ release later this month). Upside could still come from maintenance works from RAPID (e.g. pipe replacements), on top of stronger-than-expected sales growth, with our FY20E earnings also lower than consensus by around 8%. Additionally, given the added earnings visibility moving forward, we also expect dividend to be restored to a more “normalised” level of 30% pay-out in FY20, after skimping on cash dividend for most of FY19 (YTD cash dividend: 0.5 sen per share).

Upgrade to OUTPERFORM, from MARKET PERFORM previously. Similarly, we increase our TP to RM0.69 (from RM0.46 previously), pegged to 0.9x PBV on FY20E (from “floor-valuation” of 0.6x PBV previously), underpinned by its improved outlook given restoration of earnings’ visibility. Our ascribed valuation is close to its average PBV valuation of 1x, implying PER of 13-14x (also close to average), and is somewhat in-line with our ROE-study (conducted to examine the relationship between a stock’s PBV-valuations and its ROE-levels) given its ROE of c.7%.

Risks to our call include: (i) slower-than-expected trading volumes, (ii) lower-than-expected manufacturing utilisation, and (iii) delayed positive outcome from the DOC.

Source: Kenanga Research - 8 Apr 2019