This article first appeared in The Edge Financial Daily on April 9, 2019
Pantech Group Holdings Bhd
(April 8, 59 sen)
Upgrade to outperform with a higher target price (TP) of 69 sen: Having suffered a lacklustre financial year 2019 (FY19), we see a potential restoration of earnings visibility in FY20, coming from a possible uplift of US shipment suspension by the Department of Commerce (DOC), with a 2H20 boost forming our base-case assumption, and sales from new fields engineering and contingency (E&C) projects, capitalising on Petroliam Nasional Bhd’s (Petronas) increased upstream capital expenditure (capex).
We increase our FY20E (estimate) earnings by 7%, while keeping our FY19E numbers intact.
To recap, in July 2018, Pantech suspended shipments of its carbon steel butt-weld fittings to the US following a preliminary affirmative anti-circumvention determination issued by the DOC.
However, we gathered that the DOC has concluded its verifications on Pantech in late-February.
Hence, 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 “dark horse” beneficiary of Petronas’ increased upstream capex. Recall that Petronas had committed to an increased capex of more than RM50 billion for 2019 (from RM47 billion in 2018), of which approximately RM30 billion will be for upstream, after it focused much of previous years’ capex on downstream.
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 E&C phases of the fields.
We believe the potential uplift of US shipment suspension, coupled with orders from local projects may help to mitigate some earnings gap from the completed refinery and petrochemical integrated development projects (estimated to have contributed approximately approximately 30-40% of FY18 earnings, and about 10% of FY19 earnings).
Upgrade to “outperform” from “market perform” previously. Similarly, we increase our TP to 69 sen (from 46 sen previously), pegged at 0.9x price to book value (PBV) on FY20E (from “floor-valuation” of 0.6x PBV previously), underpinned by its improved outlook given restoration of earnings’ visibility. — Kenanga Research, April 8