Investment Highlights

• We maintain HOLD call on Pentamaster Corp (Pentamaster) with an unchanged fair value (FV) of RM4.64/share. Our FV is based on FY23F PE of 27x, at parity to the group’s 3-year forward average. We make no adjustment to our neutral 3-star ESG rating (Exhibit 6).

• We retain our forecasts as Pentamaster’s 1QFY23 core net profit of RM22mil (-0.1% QoQ, +5% YoY) is in line with our and consensus expectations as it accounts for 17% of our FY23F earnings and 20% of consensus. We are anticipating a stronger 2HFY23 to be driven by a gradual recovery in the semiconductor industry and higher contribution from automated test equipment (ATE) as delivery pace picks up.

• The company reported a robust revenue of RM165mil (+12% QoQ, +13% YoY), on the back of stronger sales from factory automation solutions (FAS) division.

• ATE continued to be the group’s largest revenue contributor, accounting for 67% of 1QFY23 topline. The division’s 1QFY23 revenue inched down 3% YoY, due to a delay in project delivery. Nevertheless, this division continues to benefit from global vehicle electrification trends. The automotive segment contributed 79% of ATE’s 1QFY23 total revenue, up from 45% in the previous year.

• In tandem with the lower revenue, ATE division’s 1QFY23 PBT declined by 15% YoY. The segment’s PBT margin (- 3.5%-pts YoY) also was affected by an increase in labour cost following a salary adjustment exercise.

• The FAS division’s 1QFY23 revenue rose 71% YoY following strong demand from the medical device segment. This segment surged to become a key revenue driver, contributing 35% (from 3% previously) of FAS revenue. This translates into a stronger 1QFY23 FAS core PBT of RM9mil (+2.4x YoY).

• FAS PBT margin improved 5%-pts YoY due to favourable product mix and better operating leverage. The group’s order book momentum continues to be driven by demand for FAS due to massive post-pandemic adoption of automation in factory processes.

• While we remain positive on the group’s prospects as demonstrated by its decent results and strategy riding on the automotive electrification momentum, the stock looks fairly valued at current levels. The company is trading at 28x FY23F PE, near its 4-year average of 29x.

• Also, given that Pentamaster is currently running at full capacity, any FY23F revenue upside potential is likely limited to improvement in higher value-add projects and increase in productivity.

Source: AmInvest Research - 12 May 2023