Investment Highlights

• We maintain our HOLD recommendation on Pentamaster Corp (Pentamaster) but lower our fair value to RM4.99/share, pegged to an unchanged FY22F PE of 33x (previously RM5.52/share). We make no price adjustments to reflect our 3-star ESG rating (Exhibit 9).

• We lower our FY21F–FY23F forecasts by 9–10% to account for the impact of the global chip shortage on demand relating to the automotive segment and typically longer project lead times for its group’s factory automated solutions (FAS) segment which may be impacted by travel restrictions relating to Covid-19.

• Pentamaster’s 1QFY21 results were beneath expectations at RM17mil after excluding a net one-off exceptional loss of RM0.8mil mainly due to losses from changes in fair value of forward contracts and loss on disposal of PPE being offset by unrealized forex gain. The results accounted for 16% of our and consensus full-year estimates.
   
• YoY: 1QFY21 core profit rose only 3% despite revenue rising 15% as gross profit margins had compressed by 4.1 ppts YoY to 29.8% due to higher costs where COGS, administrative expenses and distribution expenses had risen by 22%, 6% and 65% respectively which we believe were related to Covid-19 restrictions. The higher revenue in 1QFY21 mainly came from stronger demand for the group’s automated test equipment (ATE) products. In 1QFY21, the contribution of its ATE segment rose to 70% while contribution of its factory automated solutions (FAS) segment declined to 30% (Exhibit 4)
   
• YoY segmental review:

• ATE: Revenue climbed 21% leading PBT to rise by 22% mainly due to growth in its smart sensor test equipment and solutions, particularly relating to the electro-optical and automotive customer segments which grew by 51% and 161% respectively. This is due to recovery in the smartphone and peripheral devices market. Meanwhile, the automotive segment fell by 36% due to industry-wide disruption in production due to the global chip shortage.

• FAS: Revenue grew 3% but PBT shrank by 55% due to a change in product mix and the segment’s typically longer timing for project delivery.

• QoQ: While revenue rose 5%, core profit declined 33% mainly due to higher staff costs arising from share award expenses amounting to RM3.3mil. Furthermore, 4QFY20 also saw a tax credit of RM3.2mil vs. 1QFY21 tax expense of RM0.8mil which led to a higher base effect. All customer segments showed growth except for the automotive segment where revenue dropped 62% due to the aforementioned reasons.

• Outlook: Although order momentum has been improving since the beginning of 2021, the group is closely monitoring the global supply chain constraints and focusing on material sourcing to ensure timely delivery of its customer commitments. Pentamaster expects structural growth in the automotive segment in the medium term and growth in the electro-optical segment amid the rollout of 5G and as newer smart sensors are developed in the smart devices market

• We continue to like Pentamaster but believe that the stock is fairly valued at the 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 - 10 May 2021