Pantech’s AD upliftment to boost profits in 2HFY20

TheEdge Thu, Jun 20, 2019 10:31am - 4 years View Original


Pantech Group Holdings Bhd
(June 19, 57 sen)
Maintain buy with a higher target price (TP) of 75 sen:
The US Department of Commerce (DoC) issued a final affirmative determination on Pantech — concerning circumvention of anti-dumping duty (AD) order on carbon steel butt-weld pipe fittings from Malaysia.

Recall that earlier in July 2018, the DoC issued a preliminary determination that Pantech had circumvented the AD order above. Subsequently, the group temporarily suspended US shipments of the said products after imposition of 182.9% AD.

In this final determination following an Anti-circumvention Inquiry, DoC has verified the group’s ability to trace the country of origin of its shipments. Therefore, Pantech may now continue its US exports without being subject to AD.

The above is provided that Pantech and its importers provide required certifications and documentation to the US Customs and Border Protection. Additionally, certifications and supporting documentation must be provided to DoC upon request.

Following the AD upliftment, Pantech will immediately resume shipments of its carbon steel exports to the US. As a result, contribution from this segment is projected to normalise by 3QFY20.

We are positive on this development, which falls within our expectations. Following resolution of this AD matter, the management believes in a swift recovery in profits and capacity utilisation for the carbon steel segment.

We understand that despite a lapse of almost a year, the group’s major US customers remain committed. In fact, they have been working hand-in-hand with management to lobby for Pantech at DoC.

Additionally, post-resolution, they are ready to receive shipment of Pantech’s existing product inventory of about two months. This ready stock is worth approximately US$10 million to US$12 million, and will flow directly to its bottom line, from our understanding. Therefore, this would potentially provide a big boost to profits in the second half of financial year 2020 (2HFY20).

We increase capacity utilisation for Pantech’s carbon steel plant to 90% in FY20-FY21 (previous: 38%/75%). Recall that we had earlier reduced our utilisation assumption to account for progressive diversion of US exports to alternative markets. As a result, our FY20-FY21 earnings forecasts are raised by 0.3% to 1.8%.

We roll forward our valuation base year to calendar year 2020. Correspondingly, we lower our target forward price-to-earnings multiple to 10 times. This is in-line with its historical average. As a result, our TP for Pantech is raised to 75 sen (previous: 73 sen). Maintain “buy”.

We believe the group is primed for mergers and acquisitions on the back of i) attractive valuations for distressed oil and gas (O&G) companies, ii) the group is hungry for inorganic growth at this juncture, and iii) accommodative balance sheet with RM84 million cash and 0.3 times net gearing.

We believe that Pantech is keen to acquire smallish bite-sized acquisitions within the same value chain or product segment.

Therefore, we postulate that any near-term acquisitions could possibly be distressed companies, with a manageable price tag of RM10 million to RM15 million. — TA Securities, June 19

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