Investment Highlights

• We maintain our HOLD recommendation on Pentamaster Corp (Pentamaster) with a higher fair value of RM5.62/share (previously RM4.99/share). Our valuation is pegged to an unchanged FY22F PE of 33x. We make no ESG adjustment to reflect our 3-star rating (Exhibit 3).

• New land purchased: Pentamaster is acquiring a piece of leasehold land in Batu Kawan for RM28.28mil. Expected completion is in 4QFY21. The proposed acquisition is aimed to improve the group’s engineering and manufacturing capability, specifically in the factory automation solution (FAS) and medical segment.

• Positive contribution ahead from factory expansion: The acquisition is in line with the group’s target to expand the medical segment, which is expected to provide meaningful contribution to the group’s top line in FY23. As more companies place emphasis on industrial automation due to rising labor cost, the group expects FAS to be a fastgrowing segment and is prepared to capture its upside.

• Capex plans: Besides the medical division’s expansion plan in FY21–FY23, Pentamaster is also expanding its factory space of up to 500,000 sq ft in Batu Kawan, Penang, which will be completed in stages. In Japan, the group has successfully established Pentamaster Automation (Japan) in Yokohama to be closer to its customer. However, the progress of Pentamaster Technology Jiangsu’s plant has been delayed due to Covid-19 restrictions.

• Higher earnings estimate: We have increased our FY21 earnings estimate marginally by RM0.9mil, factoring in a higher contribution from electro-optical segment albeit a higher distribution cost. In anticipation of the growing electric vehicle (EV) market and FAS segment as industries embracing smart manufacturing, we have raised our FY22 and FY23 earnings by 12% and 11% to RM121.2mil and RM138.7mil respectively. We believe the group’s wide offering of solutions and its strategic position in key automotive markets will provide a boost to the group’s bottom line.

• Good earnings prospect but the stock is fairly valued. Positive prospects are driven by: (i) portfolio diversification efforts across market segments and expansion of customer base; and (ii) well positioned to capture strong growth in key EV markets, such as Japan. However, we believe there is limited upside given the current high PE multiple as an equipment manufacturer, at more than 1 standard deviation above its 5-year average PE.

• Recall that 3QFY21 core profit of RM51.1mil was up by only 13% YoY despite revenue increasing 25% YoY as margins were impacted by: (1) raw material shortages; (2) supply chain constraints leading to higher shipment costs; and (3) higher project implementation costs due to higher travel costs amid Covid-19 restrictions and longer project delivery timeline.

• 3QFY21 customer segment updates: The group’s revenue breakdown by customer is shown in Exhibit 1. The electro-optical segment continues to be the top contributor to the group’s revenue, increasing 52% YoY, supported by a recovery in the smartphone market.

• Meanwhile, the semiconductor segment which saw a YoY surge of 161% in 1QFY21 has begun to taper to a growth of 39% YoY in 3QFY21, as the work-from-home trend, a driver of this segment, has generally diminished.

• For the automotive segment, its contribution increased 39% YoY despite chip shortages that had impacted project delivery timelines. Pentamaster expects this segment to expand in FY22 and is well positioned to capture the trend with its broader portfolio of automotive products such as silicon carbide, gallium nitrate solutions and insulatedgate bipolar transistors (IGBTs).The group’s consumer & industrials segment continues to contribute 14% of group’s top line, as it is tied to the adoption of Industry 4.0. Lastly, for the medical segment, the group is on track to allocate RM60mil between FY21 and FY23 for its expansion, which the management expects to contribute up to 10% of its revenue once approvals from Malaysia’s Medical Device Authority (MDA) and the US Food and Drug Administration (FDA) are obtained.

• Outlook: Pentamaster’s order book continues to be robust in the electro-optical and automotive segments. The group is well aware of the impact of supply chain constraints and is watching the development closely to ensure timely project deliveries to its customers. As cross-border restrictions are gradually lifted, the group expects to recognize revenue from its backlogged order book. As such, we anticipate Pentamaster to show growth in FY21 vs. the pre-pandemic FY19. EXHIBIT 1: 3QFY21 REVENUE BY CUSTO

Source: AmInvest Research - 5 Nov 2021