Investment Highlights

• We maintain our HOLD recommendation on Pentamaster Corp (Pentamaster) with unchanged forecasts and fair value of RM4.99/share, pegged to an unchanged FY22F PE of 33x. We make no price adjustments to reflect our 3-star ESG rating (Exhibit 5).

• Key updates from Pentamaster’s 1QFY21 conference call:

• Results summary: 1QFY21 core profit of RM17mil rose 3% YoY despite revenue rising 15% YoY as gross profit margins were impacted by: (1) raw material shortage; (2) higher shipment costs; (3) higher project implementation costs (all due to higher travel costs amid Covid-19 restrictions); and (4) a change in product mix, particularly due to an increase in the contribution for the semiconductor segment which commands relatively lower margins.

• 1QFY21 customer segment updates: The group’s revenue breakdown by customer segment is shown in Exhibit 1. The electro-optical segment continues to dominate the group’s top line, contributing 57% of revenue and growing by 51% YoY. The demand mainly stemmed from its flagship test solutions for ambient light and proximity sensors given the recovery in the smartphone market.

Meanwhile, the semiconductor segment which grew 161% YoY of revenue was boosted by demand relating to work-from-home trends and generally higher demand for chips in different manufacturing industries.

For the automotive segment, contribution declined by 36% YoY as the chip shortage had impacted project delivery timelines and resulted in lower revenue recognition. However, we note that this is not due to order deferment or cancellations. The group still expects contribution for the segment to rebound based on order momentum due to Pentamaster’s broader portfolio of automotive products with the addition of silicon carbide and gallium nitrite solutions and insulated-gate bipolar transistors (IGBTs).

For the consumer & industrials segment which contributed 14% of 1QFY21 revenue, orders remain strong (largely contributed by the group’s i-Arms solution), which are tied to the adoption of Industry 4.0 even though the group incurred higher costs relating to Covid-19 restrictions.

As for the medical segment, its products typically have a longer lead time, so QoQ revenue might fluctuate due to timing differences. However, the yearly contribution for the segment is still expected to largely come from TP Concept. Note that its single-use medical devices segment MediQ is still in its R&D stage and will only see meaningful contribution in early 2023.

• Updates on customer concentration risk: For 1QFY21, the group’s top five customers contributed 60% of revenue (vs. 45% in FY20) largely due to an increase in contribution from the electro-optical segments. The top five customers are still made up of diverse segments and shipment destinations despite electro-optical still dominating the quarter. For the quarters ahead, the contribution from the automotive segment is expected to increase following the expected recovery which would lead to a slightly healthier mix among customer segments.

• Capex plans: Recall that the group has earmarked RM60mil over three years for its MediQ segment, while also setting aside RM25mil to expand the production space at its Batu Kawan and Bayan Lepas factories in 2021. The group is currently looking out for its third plant in Batu Kawan to cater for the boost in its factory automated solutions (FAS) segment in years ahead.

• Outlook: Pentamaster’s order book continues to be robust with growth in the electro- optical segment due to increasing demand of smart sensors and the rollout of 5G, while the automotive segment is expected to expand in the medium term. The group will continue to closely monitor the global supply chain constraints, ensuring timely delivery of its customer commitments and has taken steps to mitigate risks by maintaining visibility in orders with its customers. We still anticipate Pentamaster to show growth in FY21 vs. pre-pandemic FY19.

• 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 - 11 May 2021