Investment Highlights

• We maintain HOLD on Pentamaster Corp (Pentamaster) with a higher fair value of RM4.77/share, pegged to an unchanged FY21F PE of 33x (previously RM4.21/share) which 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 Covid-19 pandemic, these innovations have also benefitted from the US-China tech decoupling.

• We lower our FY20F forecasts by 5% as we assume that the group’s revenue recognition to continue to face constraints in 4QFY20. However, we raise our FY21F–FY22F forecasts by 13–15% premised upon the assumption that the delayed revenue recognition would come in FY21F as Covid-19-related travel restrictions ease, and the contribution for the ATE segment particularly in the electro-optical segment would recover strongly.

• We attended Pentamaster’s 3QFY20 conference call and came away with the following key highlights:
  • Results summary: 9MFY20 core profit was beneath expectation at RM50mil (-29% YoY) accounting for only 62% of both ours’ and consensus’ estimates due to lower ATE sales (-38% YoY) impacted by delays in revenue recognition due to Covid-19 travel restrictions globally. However, it was offset by higher factory automated solutions (FAS) revenue (+138% YoY) which saw higher demand for its i-Arms solutions and contribution from TP Concept. GP margins fell to 34% (-2bps YoY) due to lower revenue leading to less economies of scale and a change in sales mix where more prototype projects were delivered for proof of concept (vs. higher margins commanded by repeats orders). We view this positively as the prototypes are expected to convert into orders in upcoming quarters.
  • Managing revenue recognition delays: Despite project deliveries and site installations being constrained by crossborder travel restrictions, the group said that no orders have been cancelled and orders had only been pushed back, with approx. RM60mil revenue unrecognized YTD. Besides coming up with alternative solutions such as virtual site acceptance, the group’s sales offices in Singapore, the USA, and China are able to provide site-support for customers as a way to mitigate impact of the Covid-19 restrictions. On top of this, Pentamaster is exploring strategic expansion opportunities outside of Malaysia to broaden its regional footprint as part of its long-term diversification plan.
  • More diversified revenue base: On a more positive note, save for the electro-optical (telecommunications) segment, Pentamaster has seen growth for the rest of the customer segments (Exhibit 2) while the business segment split between ATE and FAS is also more balanced (Exhibit 1). Its customer concentration risk has also been reduced to ~60% for its Top 5 customer (from ~80% before) with a more balanced market segment and geographical base as well, which helps to mitigate risks for the group.
  • Additional capex earmarked: On top of the RM60mil capex for its medical device business under Pentamaster MediQ over the span of three years, the group is also allocating RM25mil in FY21F to extend its manufacturing plant in Batu Kawan and Bayan Lepas to cater for increased orders received. As such, we account for the higher capex guidance in coming years.
  • Long-term prospects remain bright: The group’s growth prospects remain positive for FY21F onwards, mainly due to:
    • Recovery and growth in the electro-optical segment via its wider product portfolio which includes customized test equipment and active alignment assembling equipment for 3D sensor modules with exposure to vertical cavity surface emitting latter (VCSEL) technology with applications in 3D facial recognition and augmented reality,
    • Expansion into the automotive segment through its addition of silicon carbide (SiC) and gallium nitrite (GaN) power compounds and modules, end-to-end solutions for insulated-gate bipolar transistor (IGBT), AC/DC power inventor and multilayer ceramic capacitors (MLCC) – all of which are underpinned by advancements in autonomous driving, higher sales of electric vehicles (EVs) and electrification of the automotive industry,
    • Extending its reach into medical segment via incorporation of TP Concept and Pentamaster MediQ’s single-use medical devices i.e. production of dual-safety pen and IV catheters. 2021 is expected to be an R&D year for MediQ, with meaningful contribution set for 2022 as the group is working towards obtaining relevant approvals from the US Food & Drug Administration (FDA) and Malaysia’s Medical Device Authority (MDA).
• 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 the electro-optical and automotive sectors); (ii) growth in FAS supported by adoption of Industry 4.0 in the consumer & industrials segments; and (iii) portfolio diversification efforts across customer segments such as in automotive and medical, and expansion of customer base in key markets.

Source: AmInvest Research - 11 Nov 2020