Investment Highlights

• We maintain HOLD on Pentamaster Corp (Pentamaster) with unchanged forecasts and fair value of RM4.77/share, pegged to an unchanged FY21F PE of 33x in line with our updated benchmark target PE for larger-cap automated test equipment (ATE) players. This represents a 50% premium over the 3-year historical forward PE of 22x as prospects brighten for the ATE sector riding on technological trends such as Industry 4.0, electric vehicles (EVs) and autonomous vehicles, work-from-home and distance learning, and 5G.
   
• We anticipate revenue recognition for the group’s ATE segment to gradually improve in quarters ahead. The group has previously said that it is exploring alternative ways to conduct site acceptance for its machines virtually i.e. customers are able to view a live feed of the installation process and proceed with approval. Although we note that travel restrictions are still in place, we are optimistic on this development to mitigate revenue recognition delays.
   
• No limitations to production capacity during MCO 2.0. The group’s facilities are in Penang, which was placed under the MCO 2.0 starting from 13 Jan 2021. However, Pentamaster’s production is not affected it falls under one of five sectors that are allowed to operate. With no change to production capacity, we make no changes to our forecasts.
   
• We have projected FY21F earnings to surpass FY19 after FY20F was impacted by supply chain disruptions and lockdowns. Growth drivers for FY21F would be from: (i) the electro-optical segment, particularly in smartphones and ancillary products such as tablets, ear buds, and smart watches amid new applications in 3D sensing technology such as in facial recognition and augmented reality i.e. related to the group’s vertical cavity surface emitting laser (VCSEL) and light detection and ranging (LiDAR) test machines; and (ii) the automotive segment from higher demand of its end-to-end insulated gate bipolar transistor (IGBT), multilayer ceramic capacitors (MLCC), and power management and power devices with rising exposure to silicon carbide (SiC) solutions – all tied to electric and autonomous vehicles.
   
• For its medical device segment, we anticipate that meaningful contribution is only expected to begin in FY22F as Pentamaster MediQ undertakes R&D for the segment where RM60mil has been earmarked for three years. The group is currently in the process of obtaining approvals from the US Food & Drug administration (FDA) and Malaysia’s Medical Device Authority (MDA) for the production of dual-safety pen needles and safety IV catheters. Together with TP Concept, Pentamaster’s expansion into the medical segment supports its diversification goals.
   
• Meanwhile according to The Star, Pentamaster’s chairman C.B. Chuah said the group’s order book was already filled up for the 1st quarter of 2021 as at 28 Dec 2020. According to Chuah, 40% of the orders are for the ATE segment to test smartphones in sensors while the remainder are for testing equipment for automotive power components, and automated machinery relating to the medical segment which we believe would be tied to TP Concept. We are optimistic of this news as it hints of higher automotive, electro-optical, and medical segment sales for the group for the upcoming quarter 1QFY21.
   
• We continue to like Pentamaster due to its positive growth prospects. However, we deem that the stock is fairly valued. Pentamaster’s prospects are driven by: (i) growth in its ATE segment underpinned by the sustained growth for smart sensors and the upcoming 3D sensing technology wave; (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 - 20 Jan 2021