Despite 3QFY20 NP showing QoQ strength (+43%) from resumption of U.S. shipments, the recovery failed to meet expectations, posting negative YoY numbers (-16%) mainly dragged by lower trading sales. Post-results, we lowered our TP to RM0.57 (from RM0.69), pegged to FY21 PER of 12x, but maintain our OP call as we expect its earnings trajectory to remain upward bound, while decent dividend yields (~4%) could help to limit the downside .

9MFY20 below expectations. Despite posting satisfactory revenue, 9MFY20 PAT of RM27.4m came in below expectations at only 57% of our, and 58% of consensus forecasts, dragged by: (i) poorer trading sales from lower demand in local O&G projects, as well as (ii) poorer manufacturing margins from unfavourable product mix with higher production costs. Nonetheless, announced dividend of 0.5 sen per share was within expectation, bringing YTD dividends to 1.5 sen per share.

Strong sequential growth in earnings… On a QoQ basis, 3QFY20 NP of RM10.3m posted astounding earnings growth of 43%. This was on the back of stronger revenue, led by a surge in manufacturing sales after resumption of carbon steel shipments to the United States.

…but weaker YoY earnings nonetheless. Despite stronger sequential earnings, 3QFY20 NP came in 16% weaker YoY. Although revenue was higher, thanks to aforementioned stronger manufacturing, earnings were dragged by poorer trading sales from weaker demand from local O&G projects. On a cumulative basis, 9MFY20 also posted weaker NP (-24%), mainly dragged by weaker trading sales on top of poorer manufacturing margins.

Expecting a stronger FY21. Despite the poorer-than-expected results, the company is still likely to post stronger FY21 earnings, premised on full-year impact from the resumption of U.S. shipments. Meanwhile, 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 lowered TP of RM0.57 (from RM0.69 previously), pegged to 5-year mean PER of 12x on FY21E (from previous valuation of 0.9x PBV, which also implied 12x PER). Postresults, we slashed FY20E/FY21E NP by 20%/19%, after lowering our margins assumptions. Despite the somewhat disappointing results, we still see some earnings growth for FY21, while decent dividend yields (~4%) could help to limit the downside.

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 - 16 Jan 2020