We expect a potential restoration of earnings’ visibility in FY20, coming from: (i) possible uplift of U.S. shipment suspension by the DOC and (ii) sales from new fields E&C projects, capitalising on Petronas’ increased upstream capex. BUY with a target price of RM0.69 pegged to 0.9x PBV on FY20E. Our ascribed valuation is close to its average PBV valuation of 1x, implying PER of 13-14x (also close to average)

To recap, PANTECH suspended shipments of its carbon steel butt-weld fittings to the U.S. in 2018 following a preliminary affirmative anti-circumvention determination issued by the U.S. Department of Commerce (DOC). However, we gathered that the DOC has concluded their verifications on PANTECH in late-Feb. With the verifications completed, we feel that an uplift of the shipment suspension may be likely within the coming few months, after the DOC finalises its findings.

We believe PANTECH may stand as a beneficiary of Petronas’ increased upstream capex. Recall that Petronas had committed to an increased capex of >RM50bn for 2019 (from RM47bn in 2018), of which ~RM30bn will be for upstream. We reckon the increased upstream capex will be invested on the development of oil and gas new fields. PANTECH provides pipes, valves and fittings not only used for the transportation of oil and gas, but also for the engineering and construction (E&C) phases of the fields (e.g. used as topside structures and jackets, subsea platform pillars, etc).

We believe the potential uplift of U.S. shipment suspension, coupled with orders from local projects may help to mitigate some earnings gap from the completed RAPID (estimated to have contributed approximately ~30-40% of FY18 earnings, and ~10% of FY19 earnings). Overall, we increased our FY20E earnings forecast by 7%, with a U.S. shipment suspension uplift in 2H20.

Source: Rakuten Research - 8 Apr 2019