Investment Highlights

• We maintain HOLD on Pentamaster Corp (Pentamaster) with a lower fair value of RM4.21/share, pegged to an unchanged FY21F PE of 33x (previously RM4.61/share) 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 Covid-19 pandemic, these innovations have also benefitted from the US-China tech decoupling.
• We lower our FY20–FY22F forecasts by 8–9% after adjusting for lower-than-expected electro-optical (telecommunication) segment revenue, higher automotive revenues from the group’s increased product portfolio, and higher consumer & industrial revenues from the group’s i-Arms solution.
• Pentamaster’s 3QFY20 results came in below expectations at RM17mil, bringing 9MFY20 core profit to RM50mil after excluding one-off exceptional loss of RM1mil as expected credit loss (ECL) allowance on trade receivables was offset by unrealized forex gains. The results only accounted for 62% both ours’ and consensus’ full-year estimates.
• YoY: 9MFY20 core profit plunged 29% as revenue dropped 15% due to impact of lower ATE sales impacted by the delay in revenue recognition amid Covid-19 travel restrictions, which was offset by higher factory automated solutions (FAS). Meanwhile by customer segment, the 52% decline in electrooptical (telecommunication) segment) is partially offset by increases in all other segments (Exhibit 2).  
• Segmental review YoY: ​​​​​​
  • ATE: Sales dropped 38% as revenue recognition was impacted by delays in project shipment and site installations due to global travelling restrictions on top of limited production capacity as a result of workforce constraints during the movement control order (MCO).
  • FAS: Sales surged 138% due to higher demand for Pentamaster’s i-Arms solutions given the increasing adoption of Industry 4.0 and contribution post-acquisition of TP Concept.
  • Smart control solutions system (SCSS): Revenue fell to RM0.2mil in 9MFY20 and wider losses of RM2mil were recorded due to ECL allowance on trade receivables of RM5mil.
• QoQ: 3QFY20 core profit rose by 2% after excluding a larger exceptional loss of RM3mil due to ECL allowances on trade receivables and unrealized forex losses which were partially offset by gains from fair value changes in forex forward contracts (vs. exceptional gain of RM0.4mil in 2QFY20). Meanwhile, revenue also increased by 2% as higher FAS revenue benefitted from a favourable change in product mix and was able to offset lower ATE revenues still impacted by delayed revenue recognition. By market segment, higher sales.
• Outlook: Pentamaster will continue to manage its project deliveries and site installations, taking into account constraints related to cross border travel imposed by the government. The group will keep up with its market expansion and portfolio diversification efforts. The group has expanded into the medical segment via Pentamaster MediQ, and also expanded its portfolio of products for the electro-optical segment, and automotive segment capitalizing potential advancements in power products through silicon carbide (SiC) and gallium nitrite (GaN) technology while the group’s i-Arms solution is gaining traction with increasing adoption of Industry 4.0.
• 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 - 9 Nov 2020