PANTECH’s relatively flat FY19 results came in above expectations due to better-than-expected operating margins. Overall, we continue to like the company given its potential earnings visibility restoration story, underpinned by a likely U.S. shipment suspension uplift, and increased local offshore fabrication activities to drive sales growth. Maintain OUTPERFORM and TP of RM0.69.

FY19 above expectations. FY19 net profit of RM47.6m came in above expectations at 106% of our, and 109% of consensus, full-year earnings forecasts, due to better-than-expected operating margins. The company has also proposed dividends of 1.0 sen per share, bringing its full-year cash dividends for FY19 to 1.5 sen per share (excluding share dividend of 1 treasury share for every 100 existing shares announced during its 3Q19 results) - above our expectations of 1.0 sen per share for the full year.

Overall flattish results. FY19 net profit saw a flattish 1% growth, with the drop from its manufacturing segment (-31%) due to its U.S. shipment suspensions mitigated by growth in its trading segment (+23%).

For 4Q19, net profit of RM11.5m was also flattish YoY, despite a 5% drop in revenue, helped by higher margin for its trading segment (14% vs 11%). Sequentially, the quarter posted a mild 3% growth in net profit QoQ, in-line with its 2% revenue growth.

Possible improvements in outlook. The company is still facing a shipment suspension for its carbon steel butt-weld fittings to the U.S. following a preliminary affirmative anti-circumvention determination in July 2018. However, we gathered that the U.S. Department of Commerce (DOC) had concluded their verifications on PANTECH in late-Feb, and hence, we form our base-case assumption that the suspension will be uplifted before 2H20. Additionally, PANTECH is also expected to be a beneficiary of increased offshore fabrication works locally, driven by Petronas’ increasing upstream capex, given that it is the only locally owned pipe supplier under the “Petronas Framework Agreement”.

Post-results, we raised our FY20E CNP by 6% after slightly increasing our operating margins assumptions, while also introducing FY21E numbers.

Maintain OUTPERFORM with an unchanged TP of RM0.69 pegged to 0.9x PBV on FY20E. Our ascribed valuation is close to its average PBV of 1x, implying 12-13x PER (also close to average).

All told, we continue to like PANTECH on the back of its potential earnings visibility restoration story, underpinned by its (i) likely uplift of its U.S. shipment suspension, on top of (ii) sales growth driven by local fabrication projects.

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 - 25 Apr 2019