Investment Highlights

• We maintain our UNDERWEIGHT recommendation on Pentamaster Corporation (Pentamaster) with an unchanged fair value of RM3.21/share, pegged to an FY21F PE of 23x. We keep our forecasts unchanged.
• Key highlights from Pentamaster’s 2QFY20 conference call are as follows:
• Results summary: 1HFY20 core profit of RM33mil declined 23% YoY mainly due to lower automated test equipment (ATE) sales as revenue recognition was affected by travel restrictions relating to Covid-19, causing delays in project delivery schedule and site installation. This was partially offset by higher factory automation solutions (FAS) sales due to TP Concept’s contribution and higher demand for iArms solutions.
• Gross profit margins were relatively unchanged YoY at ~36% as a more diversified exposure to customer segments cushioned the negative impact of reduced sales (Exhibit 2). This was further supported by its sales offices in Suzhou, Singapore, and Sunnyvale, USA that mitigated the impact of Covid-19-induced travel restrictions globally.
• Higher semiconductor sales in 2Q: On a QoQ basis, sales to the semiconductor sector tripled. This was due to increased demand for automated optical inspection (AOI) and packaging machines mainly to customers in Taiwan and China driven by higher demand for IC chips and PCBs for products such as laptops as work-from-home requirements increased. The robust demand is expected to continue based on current order visibility.
• Recovery in 2H: Back to operating at 100% workforce, the group is ramping up production aggressively to make up for the backlog of orders. Furthermore, the group has been able to resume product site installations although at a restricted basis, having sent engineers to Singapore and Taiwan since July 2020.
• Growth will be driven by demand from the telecommunications sector due to higher optoelectronics and 3D sensing technology demand, and the automotive sector due to its broader portfolio of solutions which include end-to-end insulated gate bipolar transistor (IGBT) and multilayer ceramic capacitors which are tied to demand of electric vehicles and the electrification of the auto industry.
• Although we like Pentamaster due to its positive prospects, we deem that the stock is overvalued given its recent runup in its share price, currently trading at 39x PE. The group’s positive prospects arise from: (i) growth in the ATE segment due to higher demand of smart sensors in devices and growth of 3D sensing technology; (ii) FAS growth supported by industry 4.0 adoption; and (iii) potential margin expansion from its portfolio diversification efforts.

Source: AmInvest Research - 18 Aug 2020