Investment Highlights

• We maintain our BUY recommendation on Pentamaster Corporation (Pentamaster) with a higher fair value of RM 5.39/share (previously RM4.45/share), pegged to a higher FY21F PE of 23x (previously 19x), having reflected the updated sector weighted-average forward PE (Exhibit 5).

• Pentamaster’s 1QFY20 results came in line with expectations at RM16mil. This is after excluding net oneoff gains amounting RM1mil, as unrealized forex losses were offset by gains in FV of forex forward contracts.

• Despite accounting for 16% of our full-year forecasts and 17% of consensus estimates, we consider the results to be in line as we expect the group’s 2HFY20 to be stronger amid expectations of a gradual easing of Covid- 19 containment measures which may alleviate production constraints.

• YoY: 1QFY20 core profit fell 23% in tandem with revenue dropping by 16% as Pentamaster recorded lower automated test equipment (ATE) sales amid Covid-19 disruptions. This was offset by higher demand for factory automated solutions (FAS). 1QFY20 GP margin remained steady at 34%, declining by 0.6ppt despite Covid-19 constraints.

• Segmental review:

• ATE: Sales declined 33% YoY, impacted by travel restrictions relating to Covid-19 which affected Pentamaster’s project delivery schedule and site installation of products, and consequently the group’s revenue recognition.

• FAS: Sales were 95% higher YoY due to the effect of contribution from TP Concept which was acquired in September 2019 as well as higher demand for the group’s i-ARMS solutions for the automotive and consumer & industrial products segment.

• Smart control solutions system (SCSS): Revenue fell to RM0.1mil (vs. RM2.1mil in previous year) and the segment recorded an LBT of RM0.3mil as the group’s i-Hub solution has yet to contribute positively pending finalization of its modular system and as Pentamaster continues cost management measures.

• QoQ: Core profit rose 34% after taking out larger net one-off gain of RM11mil contracts in 4QFY19, mainly from gains on FV changes in forex forward contracts. However, net profit slid 25% in line with 21% lower revenue due to lower ATE sales as aforementioned and lower GP margin due to less economies of scale.

• Seeing diversification in product portfolio and customer segments: In 1QFY20, Pentamaster’s ATE sales were more diverse, spanning across the automotive segment, 5G infrastructure and 3D sensing portfolio on top of its flagship ambient and proximity sensors test solutions. Telecommunications remains as the group’s largest customer segment, contributing 43% of revenue in 1QFY20 (vs. 68% in 4QFY19). However, higher sales to automotive and consumer & industrials segments which rose by 51% and 28% YoY respectively have led to a more diverse portfolio for the group (as seen in Exhibits 3 & 4). This is in line with the group’s aim to diversify and increase its exposure to more industry segments.

• ESG initiatives to combat Covid-19: Pentamaster is working on producing low-cost ventilators for local hospitals and less developed countries. The product is currently in its prototyping stage and will be ready within 4 weeks. As it is an environmental, social and governance (ESG) initiative, it would not contribute to the group’s income but there is a potential for Pentamaster to leverage the know-how relating to automation which could support its penetration into the medical segment in future.

• Outlook: We expect the group’s 2Q to see a larger negative impact from Covid-19 containment measures, factoring in the impact of the movement control order (MCO) in Malaysia that started on 18 March 2020 as well as travel restrictions and logistic delays in many countries worldwide which have impacted Pentamaster’s project delivery timeline. This is despite the MCO being relaxed with the group being allowed to operate at 100% of its workforce capacity as at 29 April 2020 (vs. 50% at the beginning of MCO). On the plus side, the group has not seen any major cancellation of its orders but rather deferment of orders. We believe that the group would be able to clear its order backlog once the supply chain constraints ease as more countries relax their lockdown measures further in subsequent quarters.

• We continue to like Pentamaster due to its positive growth prospects despite expectations of a weak 1H, impacted by Covid-19 as we anticipate a recovery in earnings in subsequent quarters. The group’s positive prospects are driven by: (i) growth in its ATE segment due to sustained growth for smart sensors and the upcoming 3D sensing technology wave (tied to the telecommunications and automotive sectors), (ii) growth in FAS to be supported by the adoption of Industry 4.0 and synergies from acquisition of TP Concept, and (iii) margin expansion from portfolio expansion and diversification in the longer-term.

Source: AmInvest Research - 18 May 2020