PANTECH’s 1HFY20 results are deemed in line with expectations, in anticipation of a stronger 2HFY20 on the back of the resumption of shipments for its carbon steel to the US. Overall, results were weaker due to higher manufacturing costs from ramping up of production ahead of the US shipment resumption, coupled with lower demand from local oil and gas projects. Maintain OUTPERFORM and TP of RM0.69.

1HFY20 results deemed broadly within expectations. We deem PANTECH’s 1HFY20 net profit of RM18.4m to be broadly within expectations, despite making up only 38%/35% of our/consensus fullyear earnings forecasts. This is on the back of an expected stronger 2HFY20, driven by the resumption of carbon steel shipments to the US after almost a year of suspended shipments following the preliminary affirmative anti-circumvention determination announced in July 2018. Since then, a final affirmative determination overturning the prior shipment suspension to the US had been announced in June 2019. Dividend of 0.5 sen per share was as expected.

Poorer 2QFY20 results. YoY, 2QFY20 recorded a 34% decrease in net profit, despite flattish revenue. Margins were hampered due to higher costs in its manufacturing segment as a result of ramp-up in production ahead of the resumption of shipments to the USA, while its trading division was also hit by lower sales demand from local oil and gas projects. Similarly for QoQ, net profit deteriorated 36% sequentially, despite a marginal growth in revenue, due to the aforementioned higher manufacturing costs and lower trading sales demand locally. Cumulatively, 1HFY20 dropped 27% YoY, given the suspension of U.S. shipments for its carbon steel earlier in the year, coupled with the aforementioned higher manufacturing costs and lower trading sales demand.

Expecting a stronger 2H. Following the lifting of the suspension of shipment to the US, PANTECH has immediately resumed productions and shipments. As such, we expect stronger earnings to kick in from 3QFY20 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 unchanged TP of RM0.69, pegged to 0.9x FY20E PBV - implying 12x PER, which is close to its 5-year average.

We continue to like PANTECH given certainty in its earnings recovery and decent dividend yields, on top of palatable valuations, which we believe have not fully reflected upcoming positives; thus providing an attractive entry currently. 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 - 24 Oct 2019