Yesterday, PANTECH announced having received a final affirmative determination from the U.S. DOC, which effectively removes the existing U.S. shipment suspension for its carbon steel butt-weld fittings. We are positive on this, seeing it as a restoration of earnings, and falling broadly within our base-case assumption of the suspension uplift coming in before 2HFY20. Reiterate OUTPERFORM, with TP of RM0.69.

Uplift of U.S. Shipment suspension. Yesterday, PANTECH announced that the U.S. Department of Commerce (DOC) issued a final affirmative determination concerning circumvention of antidumping duty order on carbon steel butt-weld pipe fittings from Malaysia. This effectively removes the existing suspension of shipments of its carbon steel butt-weld fittings to the U.S., which arose as a result of the preliminary determination issued in July-2018.

To recap, in July-2018, the DOC issued a preliminary affirmative antidumping circumvention determination concerning carbon butt-welds fittings from Malaysia. And, as a result of this, PANTECH had suspended shipments of its carbon steel butt-weld fittings to the U.S. since then, leading less-than-spectacular earnings growth and dividend pay-out in FY19A. Following yesterday’s announcement, PANTECH will “immediately commence shipments of its carbon steel butt-weld fittings to the U.S. once again”, and the company projects contributions from the U.S. will normalise by 3QFY2020.

Positive on the final affirmative determination. We are extremely positive on this announcement, as it once again restores earnings visibility back to the company. In fact, our anticipation of this potential shipment suspension uplifting formed as our base argument for our upgraded OUTPERFORM call idea-piece (refer to report dated 8-April- 2019). The announcement also potentially implies that PANTECH employs good business practices and that the DOC had found no evidence of export circumvention. Nonetheless, we kept our FY20-21E numbers unchanged as we deem the announcement falls broadly within our base-case assumption of the shipment suspension uplift to be materialised before 2HFY20. That said, expect 2H numbers to be stronger, with 3QFY20 serving as the first full quarter to benefit from the restored U.S. shipments.

Further growth catalyst? This aside, we believe PANTECH could also possibly benefit from a higher local oil and gas upstream capex environment. PANTECH provides pipes, valves and fittings not only used for the transportation of oil and gas, but also for the engineering and construction phases of offshore fields (e.g. used as topside structures or jackets), with it being the only locally-owned pipe supplying company under the “Petronas Framework Agreement”.

Reiterate OUTPERFORM with an unchanged TP of RM0.69, pegged to 0.9x PBV on FY20E – close to its average PBV valuations of 1x, and implying 12-13x PER (also close to average). We continue to like PANTECH, especially with the U.S. shipment suspension overhang now finally lifted given the restoration of its earnings visibility. Further upside to our numbers could still come from strong U.S. early sales in 2QFY20, which we have still yet to impute into our assumptions.

Risks to our call include: (i) slower-than-expected trading volumes, (ii) lower-than-expected manufacturing utilisation, and (iii) poorer-thanexpected margins.

Source: Kenanga Research - 19 Jun 2019