Investment Highlights

• We upgrade Pentamaster Corp (Pentamaster) to HOLD from UNDERWEIGHT, raising its fair value to RM4.61/share, pegged to a higher FY21F PE of 33x (previously RM3.21/share; PE of 23x). We maintain our forecasts.
• Our higher PE is in line with our benchmark target PE for large-cap automated test equipment (ATE) players. The 33x PE represents a 50% premium over the 3-year historical forward PE of 22x as prospects brighten for the ATE sector riding on innovations such as 3D sensors, Industry 4.0, electric and autonomous vehicles, and 5G. Accelerated by the Covid19 pandemic, these innovations have also benefitted from the US-China tech decoupling.
• We had a conference call with management recently and came away with the following key highlights:
  • Improved revenue recognition for 2H: Recall that Pentamaster’s 1HFY20 results were impacted by lower ATE sales as travel restriction measures had impacted the group’s project delivery and site acceptance tests which caused delays in revenue recognition.
    
    Since July 2020, Pentamaster has been able to resume product site installations mainly in Singapore and Taiwan, although still at a restricted basis amidst the ongoing pandemic. Alternative methods such as virtual site acceptance and customers sending their own agents to the group’s facilities to undergo acceptance are expected to aid recovery.
    
    2HFY20 is expected to show better performance due to expectations of higher demand of optoelectronics and 3D sensing technology in the telecommunications sector and automotive solutions.
     
  • Breakthrough in IGBT: Pentamaster’s efforts to diversify into the automotive segment have shown much progress through its ATE portfolio which includes multilayer ceramic capacitors (MLCC), insulated-gate bipolar transistor (IGBT), AC/DC power inventor, automotive power management and power devices – all benefitting from advancements in electric vehicles and the electrification of the automotive industry.
    
    The group’s IGBT solutions have already contributed to group’s earnings in 1H, with Pentamaster anticipating a huge uptick in orders from China in 2021. The group also said that the industry is turning towards silicon carbide and gallium nitride technology which offers lower loss during power conversion and better connectivity compared to silicon.
     
  • Medical segment updates: The medical segment has benefited from TP Concept’s contribution while its new subsidiary Pentamaster MediQ is in the process of obtaining approvals from the US Food & Drug Administration (FDA) and Malaysia’s Medical Device Authority (MDA) with meaningful contribution from MediQ expected to come in 2022.
  • FY20 performance is expected to be flattish or slightly weaker due to lesser contribution from the telecommunication segment despite the anticipation of 5G smartphone testers offsetting overall declines. Telecommunications commanded 69% of total revenue in FY19. Covid-19 has impacted the global mobile phone industry amid initial supply chain shocks, retail closures and more prudent spending on non-essential products
     
• We continue to like Pentamaster due to its positive growth prospects driven by: (i) growth in its ATE segment underpinned by the sustained growth for smart sensors and the upcoming 3D sensing technology wave (tied to telecommunications and automotive sectors); (ii) growth in FAS supported by adoption of Industry 4.0; and (iii) portfolio diversification efforts across market segments and expansion of customer base.

Source: AmInvest Research - 21 Oct 2020