We are sanguine on the outlook of PANTECH due to: (i) Resilient oil prices encouraging higher upstream investment; (ii) Potential from CCUS and Hydrogen; (iii) Attractive dividend yield and undemanding valuation. We make some housekeeping adjustments, raising our FY24/FY25/FY26 earnings forecasts by 3.4%/4.3%/5.0% respectively. Following the adjustments in our earnings forecasts, we raise our target price to RM1.18/share pegged to 10x CY24 EPS. Reiterate Buy.

Resilient Oil Prices Encouraging Higher Upstream Investment

Oil and gas (O&G) sector would continue to be the main contributor for Pantech Group Holdings Bhd’s (PANTECH) revenue, consistently making up more than 50% of it. The sector contributes to 55% of the group’s revenue in FY23. We expect oil price to remain bullish in the short to medium term driven by (i) voluntary production cut by Saudi Arabia and Russia that places a floor to the oil price, (ii) relatively resilient demand despite synchronised interest rate hike by global central banks, (iii) inventory restocking. On the backdrop of resilient oil prices, the upstream investments in the O&G sector should be strong, which would benefit PANTECH.

Potential From CCUS and Hydrogen

PANTECH is a one-stop centre for pipes, valves and fittings (PVF) to provide solutions for gas and fluid transmission. O&G sector is feeling increasing pressure to decarbonise their operations, increasing the demand for carbon capture, utilisation and storage, potentially benefitting PANTECH. In addition, the potential of hydrogen as an energy carrier that can store, move and deliver energy will increase the demand for the production, delivery, and end-use of the gas in the future. In particular, the delivery of hydrogen may necessitate the installation of new pipeline beside the existing transmission pipeline for natural gas. Nonetheless, according to the Hydrogen Economy and Technology Roadmap, most of the new domestic demand for hydrogen is projected to start from the year 2025 onwards. Hence, we do not expect major investment into hydrogen transmission pipeline until demand picks up from 2025 onwards.

Attractive Dividend Yield and Undemanding Valuation

At dividend payout assumption of 50%, PANTECH offers an attractive dividend yield of 6.8%-7.3% for FY24-FY26. Additionally, PANTECH is currently trading at undemanding valuation of 7.1x FY24 EPS.

Impact

We make some housekeeping adjustments, raising our FY24/FY25/FY26 earnings forecasts by 3.4%/4.3%/5.0% respectively.

Valuation

Following the adjustments in our earnings forecasts, we raise our target price to RM1.18/share (previous: RM1.08/share) pegged to 10x CY24 EPS. Reiterate Buy.

Source: TA Research - 12 Oct 2023