Investment Highlights

• We downgrade our call on Pentamaster Corp (Pentamaster) to HOLD from BUY with a lower fair value (FV) of RM3.24/share, pegged to a normalised PE FY22F PE of 24x (vs. RM5.62/share previously, pegged to FY22F PE of 33x). The revised target PE represents Pentamaster’s 3-year average forward PE, with no adjustment to our 3-star ESG rating (Exhibit 7).

• Pentamaster’s FY21 core profit of RM72.5mil disappointed, coming in at 23% below our earlier forecast and 12% lower than consensus. Hence, we cut our earnings estimates by 21% for FY22F and 16% for FY23F on more conservative sales assumptions.

• Despite the group posting a 21% increase in revenue to RM508mil, profit after tax only rose by 2.5% YoY, primarily due to lower gross profit margin amid supply chain disruptions and material shortages.

Segmental FY21 Review:

• Automated test equipment (ATE): The segment continued to be the largest contributor the group’s top line at 70%. ATE’s revenue grew 26% YoY to RM356mil on the back of the smartphone market recovery, increasing exposure to the automotive market and continuous demand from the semiconductor industry.
  However, PBT slipped 1.2% to RM100mil due to poorer product mix with lower margin as well as rising logistics and material costs.

• Factory automated solutions (FAS): Sales for FAS, contributed 30% of Pentamaster’s revenue for FY21, increasing 12% YoY to RM152mil. This was driven by the robust demand from the group’s proprietary i-ARMS solutions in the consumer and industrial segments. Consequently, the FAS segment recorded a 44% increase in PBT to RM26mil.
• On QoQ basis, Pentamaster’s 4QFY21 revenue declined 13%, dragged by delays in project deliveries in both the ATE and FAS segments. Meanwhile, 4QFY21 PAT rose 2% QoQ to RM32mil, thanks to the cost pass-through adjustment made in the ATE segment amid inflationary pressures. Core profit however declined 40% QoQ to RM14mil, after excluding RM4mil unrealised foreign exchange gain and RM2mil mark to-market gain from foreign exchange forward contracts.
• We continue to like Pentamaster, but believe that the stock is fairly valued at its current price. Pentamaster’s outlook continues to be driven by:

(i) portfolio diversification efforts across market segments and expansion of its customer base;

(ii) growth in FAS supported by the adoption of Industry 4.0; and

(iii) its strategic position to capture strong growth in key EV markets, such as Japan.

Source: AmInvest Research - 25 Feb 2022