Valuation / Recommendation

We initiate coverage on Pantech with a BUY recommendation with a TP of RM0.720 based on FY23F EPS 6.9 sen and PE of 10.4x in line with the 5-years average, on the premise of 2-year CAGR forward earnings of 37.8%, and cheap valuations.

Investment Highlights

Distinct value proposition. Pantech is an established one-stop provider of pipes, valves, and fittings (PVF) and provides total solutions for fluid and gas transmission system. The Group has more than 500 customers (Major Customer : Petronas, Shell, Exxon, etc), and exports to a total of 69 countries worldwide where 60% of sales are derived domestically while 40% are from exports.

Oil & Gas (O&G) sector a growth driver. Petronas’s increased annual capex allocations from 5% to 9% suggesting a positive industry outlook, potentially adding tally to the Group’s current order book of RM550m. With more than 50% of the Group’s earnings derived from this sector, Pantech is in the right position to benefit from the capex cycle.

Rising contributions from the palm oil industry. Pantech supplies oil pipes, valves, and flanges (PVFs) to the palm oil industry. We think that more contracts could be secured from the palm oil industry moving forward. The company has more than 30,000 stock keeping units (SKU), better positioned to meet rising customer demands. Revenue contributions from the palm oil industry increased from 7% (FY17) to 16% (FY21) and is expected to hit 20% by FY23.

Experienced management team. The Group is currently managed by 3 key individuals who is responsible for the Group’s success which is Chairman & Group MD Dato’ Chew Ting Leng and Deputy MD Dato’ Goh Teoh Kean, both having more than 30 years of experience in the PVF solutions industry. Together with Executive Director Adrian Tan, who is also MD for various subsidiaries (Pantech Steel Industries, Pantech Stainless & Alloy Industries, Nautic Steels).

Risk factor. Key risks include fluctuation of steel prices and demand of steel products, labour shortage, and slower-than-expected contract flows.

Source: Mercury Securities Research - 3 Mar 2022