Investment Highlights

• We upgrade our recommendation on Pentamaster Corporation (Pentamaster) to BUY from HOLD with unchanged forecasts and fair value of RM5.62/share. This is pegged to an unchanged FY22F PE of 33x, 1x standard deviation above its 3-year average. We make no ESG adjustment for our 3-star rating (Exhibit 3).

• We believe that the recent sell-off in the technology sector amid rising interest rate expectations provides opportunities for investors to acquire Pentamaster’s shares at a bargain as funds gravitate toward recovery cycles.

• Recall that Pentamaster had in November 2021 purchased a piece of land in Batu Kawan to improve the group’s engineering and manufacturing capability, specifically in the factory automation solution (FAS) and medical segments. This is also part of the group’s efforts to diversify its revenue base by venturing into and expanding its medical segment. We expect the medical segment to contribute 10% of FY22F revenue once approvals from Malaysia’s Medical Device Authority (MDA) and US Food and Drug Administration (FDA) are obtained.

• In addition, the group’s early expansion in the automotive segment with test solution capabilities covering silicon carbide (SiC) and gallium nitrite (GaN) power devices is poised to benefit from the strong growth trajectory of vehicle electrification, which will be one of the key themes in 2022.

• The group has undertaken several initiatives such as extending its vendor base, stock consolidation and obtaining longer visibility period of up to one year from customers to mitigate supply chain constraints. These initiatives will remain after the gradual easing of these issues. We believe this will improve Pentamaster’s efficiency moving forward in terms of project deliveries and translate into higher margin, which we have factored into our forecast.

• Key risks: Nevertheless, we remain mindful on: (i) the resurgence of new Covid-19 variants and the efficacy of existing vaccines; and (ii) margin compression due to Pentamaster’s inability to pass through costs.

• Pentamaster’s positive outlook is driven by: (i) portfolio diversification efforts across market segments and expansion of customer base; (ii) growth in FAS supported by the adoption of Industry 4.0; and (iii) it is well positioned to capture strong growth in key EV markets, such as Japan.

• With the stock trading at a bargain FY21F PE of 30x, well below its 3-year peak of 50x in Nov 2020, we believe investors should take the opportunity in the current price correction to accumulate the stock.

Source: AmInvest Research - 19 Jan 2022