We  are  not  entirely  surprised  by  Pantech’s  weaker  3QFY15  (Feb)results. We trim our call to NEUTRAL as the recent share price gain has capped  the  upside  to  our  MYR0.84  TP  at  9.1%.  We  expect  near-term results weakness  in the  next few quarters,  but  Pantech  could still book satisfactory earnings thanks to consistent pipe and fitting requirements for maintenance and the ongoing RAPID works. 

A weaker 3Q. As anticipated, Pantech posted a weaker 3QFY15 profit of MYR9.1m,  down  32.2%  QoQ.  9MFY15  profit  met  our  expectations  at 82%  of  our  recently-revised  full-year  projection,  but  was  below consensus  estimates.  3QFY15  revenue  dropped  12.2%  QoQ,  as  the c.60%  plunge  in  oil  prices  over  the  last  six  months  has  dampened Pantech’s  business,  which  is  closely  linked  to  the  oil  and  gas  (O&G) industry. We believe many O&G  players  have put their capex plans  on hold as they re-evaluate their existing and new projects. 

A  resilient  business  vs  its  peers.  That  said,  we  think  Pantech  is  a niche producer of carbon and stainless steel butt weld fittings, induction long  bends  and  stainless  steel  pipes.  This  business,  which  makes  up 80% of export sales, is benefitting from the weaker MYR. Pantech also supplies to customers  who are  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. 

NEUTRAL  with  an  unchanged  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.  Therefore, we  maintain  our FY15-17earnings  projections.  However,  Pantech’s  4.8%  share  price  gain  since our last update a week ago has capped the upside to our MYR0.84 TP at 9.1%.  This prompted us to  trim our recommendation to NEUTRAL  (from Trading Buy). Our TP is derived from a target P/E of 10x FY16F EPS. 

Source: RHB