PANTECH’s results came in above expectations, due to over-estimation of negative impact from suspension of shipments to the United States. However, with the U.S. government now in shutdown, we no longer feel that a resolution regarding the issue can be reached anytime soon from the DOC. Given this indefinite uncertainty, we have priced the stock to its floor valuations of 0.6x PBV, arriving at a TP of RM0.46, with downgraded call to MP.

9M19 above expectations. 9M19 net profit of RM36.2m came in above expectations, accounting for 85% of our, and 88% of consensus, full-year earnings forecasts. We believe this was because of an overestimation of the negative impact from its suspension of shipments of carbon steel butt-weld fittings to the U.S. following a preliminary affirmative anti-circumvention determination issued by the U.S. Department of Commerce (DOC) in July-2018. The company had also announced treasury share dividend on the basis of 1 share for every 100 existing shares. This brings YTD dividends to around 0.95 sen, in line with expectations.

Better results overall. Cumulative 9M19 net profit saw a flattish improvement of 1% YoY, on the back of better trading segment (+18%) due to increased demand, mitigating deteriorated manufacturing segment (-18%) due to the aforementioned U.S. shipment suspensions. For the individual quarter of 3Q19, net profit of RM11.2m came in higher by 11% YoY, thanks to jump in trading segment (+47%) coupled with improvement in trading margins by +3ppts, offsetting 47% plunge in its manufacturing segment due to the aforementioned U.S. shipment suspensions.

Sequentially, 3Q19 net profit recorded a mild 3% increase QoQ largely thanks to the favourable effective tax rate (20% vs. 27%). On the PBT- level, results were actually lower by 6%, dragged by both trading (-5%) and manufacturing (-15%) segments.

Overhanging U.S. shipment suspension. Earlier, we anticipated a final decision from the DOC regarding its anti-circumvention determination to be reached by Feb-2019. However, with the U.S. government now in shutdown, this may have thrown the timeline into uncertainty. With no clarity as to when will this overhang will pass, we opted to trim our FY20E earnings by 8%, accounting for full-year loss of butt-weld fittings to the United States. However, our FY19E earning is raised by 5% on the back of the better-than-expected results.

Downgrade to MARKET PERFORM. Given the uncertainty of the DOC issue, we have opted to conservatively price the stock at its floor valuations of 0.6x PBV (at around -2SD from its mean PBV valuations), arriving at a TP of RM0.46 (from RM0.55 at 0.7x PBV, -1.5SD from its mean). We feel compelled to downgrade our call as we see a lack of re-rating catalyst, especially the uncertainty regarding the shipment-to- US issue, versus our previous expectations of a conclusion by Feb- 2019. With that said, however, should we see a positive outcome, we may look to re-rate its valuations back to 0.7-0.8x PBV (around -1.5 to - 1 SD from mean).

Risks to our call include: (i) slower-than-expected trading volumes, (ii) lower-than-expected manufacturing utilisation, and (iii) earlier-than- expected positive outcome from the DOC.

Source: Kenanga Research - 18 Jan 2019