PANTECH’s 1Q20 results came in within expectations – sequentially flattish but weaker YoY on the suspension of carbon steel sales to the U.S. since July 2018, but this has been lifted since June 2019. Hence, with PANTECH immediately resuming sales to the U.S., we expect stronger earnings to kick-in from 3Q20, providing earnings and dividend visibility. Maintain OUTPERFORM and TP of RM0.69.

1Q20 results within expectations. PANTECH reported 1Q20 net profit of RM11.2m, coming in within expectations at 23%/21% of our/consensus full-year forecasts (as anticipated in our results preview report dated 24 July 2019). The announced dividend of 0.5 sen per share is also broadly within expectation.

Flattish sequential earnings. QoQ, earnings saw minimal fluctuation (-2.5%), on the back of flattish revenue growth (+2%). However, YoY, earnings showed a 21% dive (in-line with revenue decline of 19%), due to suspension of shipments to the United States for its carbon steel fittings since July 2018, arising from the preliminary affirmative anticircumvention determination. Nonetheless, the shipment suspension has been overturned in June 2019 following a final affirmative determination from the U.S. Department of Commerce (DOC).

Expecting a stronger 2H. With the suspension of shipment to the United States lifted, PANTECH has immediately resumed its shipments there. As such, we expect stronger earnings to kick-in from 3Q20 onwards. Further growth catalyst could still come from increased upstream oil and gas activities in the region, with the company being the only locally-owned pipe supplier 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. Furthermore, we believe it is trading at attractive valuations, which have not reflected the upcoming positives, thus providing an attractive entry. Further upside to our numbers could still come from stronger-than-expected sales from the U.S. No changes made to our FY20-21E numbers post-results.

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 - 26 Jul 2019