PANTECH’s weaker FY20 results came within expectations, dragged by lower demand from local O&G projects, coupled with a lower margin product mix. Moving forward, we expect upcoming 1QFY21 to be in the red, given MCOled operational disruptions. Sales outlook has also dampened following global trend of capex cuts among the oil majors. Maintain UNDERPERFORM with TP of RM0.31.

FY20 within expectations. FY20 PAT of RM36m came in within expectations at 95% and 99% of ours and consensus’, respectively. However, dividends were deemed as broadly below expectations as the company did not announce any cash dividends. Instead, it announced a share dividend on the basis of 1 treasury share for every 100 existing shares held.

Poorer results overall. FY20 saw a YoY plunge in earnings by 22%, as both its core segments of trading and manufacturing displayed deteriorated results. Its trading segment saw lower contributions, mainly due to the lower sales demand from local oil and gas projects. Meanwhile, although its manufacturing segment saw higher revenues given its resumption of carbon steel shipments to the USA, bottom-line contribution was still anaemic, dragged by start-up costs for the initial shipment coupled with a lower margin product mix. Sequentially, 4QFY20 saw earnings falling by 30%, dragged by slower export sales from its manufacturing segment, coupled with a lower margin product mix for its trading segment.

Upcoming quarter possibly in the red. The company’s operations were suspended following the implementation of the Movement Control Order (MCO), with operations allowed to resume only in late April 2020. As such, we believe it is highly likely for its upcoming 1QFY21 results to skid into the red. Movement restrictions following the Covid- 19 pandemic are also expected to continue causing mild disruptions to business operations. Nonetheless, we are still expecting full-year FY21 earnings to be profitable. On the bigger picture, PANTECH is also expected to be adversely affected by the global trend of capex cuts by major oil producers. PANTECH’s business relies on greenfield investments to drive its sales, and hence, lowered capex spending by the oil majors would generally weaken its sales outlook moving forward.

Maintain UNDERPERFORM, given its exposure towards the capexdependent value chains within the oil and gas sector. Post-results, we slashed our FY21E earnings by 55%, accounting for the MCO-led business disruptions expected in 1HFY21, while simultaneously introducing new FY22E numbers. Following the earnings cut and rolling forward our valuation base year, our TP is also lowered to RM0.31 (from RM0.36, previously), pegged to unchanged valuations of 7x PER on FY22E EPS – in line with -2SD from its mean valuations.

Risks to our call include: (i) huge surge in trading volumes, (ii) higher demand for manufactured products, and (iii) stronger-than-expected product margin mix.

Source: Kenanga Research - 12 Jun 2020