Investment Highlights

• We maintain HOLD on Pentamaster Corp (Pentamaster) with a higher fair value of RM5.52/share, pegged to a rolled-forward FY22F PE of 33x (previously RM4.77/share, pegged to an FY21F PE of 33x). This is in line with our benchmark target PE for large-cap automated test equipment (ATE) players. We maintain our forecasts.

• 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.

• Pentamaster’s 4QFY20 results came in within expectations at RM25mil, bringing FY20 core profit to RM70mil after excluding one-off exceptional gain of RM1mil mainly due to reversal of inventories written down. The results were exactly in line with our and consensus forecasts.

• YoY: FY20 core profit and revenue declined by 14% and 15% respectively mainly due to the impact of lower ATE sales which were caused by delays in revenue recognition amid Covid-19 travel restrictions, offset by higher demand for factory automated solutions (FAS). In FY20, ATE contributed 68% of revenue while FAS contributed 32%. Meanwhile by customer segment, a 47% decline in electro-optical was partially offset by growth in other segments (Exhibit 2). Despite the Covid-19 pandemic, EBITDA margins remain unchanged at 27%.

• Segmental review YoY:
  • ATE: Sales fell 25% 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 soared more than double to RM18mil 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 FY20 and wider losses of RM2mil were recorded due to slowdown in project activity.
• QoQ: 4QFY20 core profit surged 85% in line with 5% higher revenue as ATE sales climbed 54%. This was mainly due to recovery in orders from the electro-optical segment, where higher project delivery was achieved as a result of order backlog. Meanwhile, FAS sales shrank 55% due to lower project delivery and as a result of expected credit losses. EBITDA margins improved by 9.3 ppts due to a better product mix.

• Outlook: Pentamaster anticipates a better FY21 based on growth momentum coming from both the ATE and FAS segments, anticipating that the global smartphone and hardware devices market is set to rebound with the deployment of 5G and adoption of smart sensors. The group is aware of Covid-19 uncertainties and is focusing on strict adherence to SOPs to minimize business disruptions.

• We continue to like Pentamaster, but believe that the stock is fairly valued at its current price. Pentamaster’s positive 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 (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 - 26 Feb 2021