With PANTECH scheduled to release its upcoming 1Q20 quarterly results later this month, we guesstimate earnings to come in sequentially flattish at roughly RM11m, as we are not anticipating any negative surprises. Nonetheless, stronger earnings are expected to come into play in the 2H of the year, underpinned by its restoration of shipments for its carbon steel butt-weld fittings to the U.S. Maintain OP, with TP of RM0.69.

Looking to a sequentially flattish 1Q20 results… PANTECH is scheduled to release its 1Q20 quarterly results later this month. Overall, with not much quarter-to-quarter changes seen, we expect the upcoming 1Q20 earnings to come in at around RM11m, somewhat similar to the RM11.1m registered in 4Q19, as we do not expect any negative surprises. As always, earnings will largely be driven by its trading segment, which historically had been the company’s largest revenue contributor.

…but expecting a stronger 2H. Moving forward, we are expecting stronger performance to kick in the 2H of the year, underpinned by the uplifting of its shipment ban for carbon steel butt-weld pipe fittings to the U.S. last month. To recap, in July 2018, the DOC issued a preliminary affirmative anti-dumping 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 to less-than-spectacular earnings growth and dividend pay-out in FY19. However, last month, the DOC overturned this with an issued affirmative determination, which effectively uplifts existing suspension of shipments of its carbon steel butt-weld fittings to the U.S.

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”.

Maintain OUTPERFORM, with an unchanged TP of RM0.69, pegged to 0.9x PBV on FY20E - implying 12x PER, which is close to its 5-year average. We continue to like PANTECH, more so with the U.S. shipment suspension overhang now finally lifted, restoring its earnings and dividend visibility. Overall, we believe it is trading at attractive valuations, which have not reflected the upcoming positives. Further upside to our numbers could still come from stronger-than-expected sales from the U.S.

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 - 24 Jul 2019