Despite the gloomy oil and gas industry outlook, we believe Pantech justifies a TRADING BUY (from Buy) given its resilient business model,albeit with a lower TP of MYR0.84 (14.3% upside). While we cut ourearnings estimates on near-term weakness, we believe Pantech couldstill book satisfactory earnings, thanks to continued pipe and fitting requirements for maintenance works and the ongoing RAPID works. 

A quick review. We had initially expected Pantech to deliver stronger 2HFY15 (Feb) numbers after its 1H profit made up just 45% of our fullyear estimate. However, a plunge in oil prices and the internal transfer of stock coverage have prompted us to re-examine its prospects. 

Weak near-term outlook.The c.50% fall in oil prices over the last fourmonths has prompted oil and gas (O&G) players to reevaluate their existing and new projects. High-cost fields are at risk of being reviewed or having their operations halted. Thus, we believe Pantech’s business –which is closely linked to the O&G industry – may slow down in the near term. 

A resilient business vs its peers. That said, Pantech is also a niche producer of carbon and stainless steel butt weld fittings, induction long bends as well as stainless steel pipes. This business, which makes up 80% of export sales, is benefiting from the weaker MYR. Pantech also supplies to customers involved in recurring maintenance works. Besides, the MYR90bn Refinery and Petrochemical Integrated Development (RAPID) project is set to continue regardless of oil price fluctuations. As a local player, this creates opportunities for the company to win supply contracts that may be substantial over the next six years of construction. 

Change to TRADING BUY with a revised MYR0.84 TP. We remain upbeat on Pantech’s long-term outlook, but prefer to be prudent at this juncture. As we anticipate a weaker business environment over the next few quarters until oil prices rebound or stabilise, we cut our FY15/FY16 earnings projections by 26.7%/23.8% while introducing our FY17 numbers. The poor market sentiment towards the long term outlook of O&G-related stocks also warrants our new recommendation; the stockcurrently justifies a TRADING BUY, as Pantech has a resilient business model. Our TP drops to MYR0.84 (from MYR1.25) as we trim our target P/E to 10x FY16F EPS from 12x.

Source: RHB