Pantech’s physical presence in Johor suggests that it may win more supply contracts from RAPID. However, it is still unable to fully compensate for the overall slowdown in sales at both its manufacturing and trading divisions. Therefore, we cut our FY17F-18F (Feb) earnings by 10.3%/10.5% respectively and trim our TP to MYR0.59 (3% upside) despite rolling over our valuation to 8x FY17 P/E. Downgrade to NEUTRAL.

RAPID – the sole silver lining? We believe Pantech would not be entirely spared from the fall in oil prices, as other oil and gas activities are likely to slow down and dent sales at its trading and manufacturing units. That said, we remain assured that the USD16bn Refinery and Petrochemicals Integrated Development (RAPID) project is proceeding according to plan – with more contracts awarded in recent months. We understand that Pantech has already begun supplying small volumes to the RAPID project. Being a local player with a physical presence in Johor and a new warehouse adjacent to the development, it may win more supply contracts that could be substantial over the next five years. Meanwhile, its FY16 earnings were 9.4%/4.9% below our and street estimates respectively. Forecast and risks. With the underperformance, we cut FY17F-18F earnings by 10.5%/10.3% respectively. We also introduce our FY19 numbers. A sharp rebound in oil prices could boost capex spending within the oil & gas sector that could lift the sales and profitability of its trading and manufacturing units. Risks to our call, hence, would include a major movement of oil prices.

Downgrade to NEUTRAL. RAPID is the only positive for the company in the immediate future and it is still unable to fully compensate for the overall sluggish sales of its manufacturing and trading divisions. Thus, we downgrade Pantech to NEUTRAL. Our valuation of 8x P/E, which is at the lower end of both the oil and gas and basic materials sectors’ P/Es, is rolled over to FY17 (from 2016), from which we derive a lower TP of MYR0.59 (from MYR0.64).

Source: RHB Research - 27 Apr 2016