Investment Highlights

• We maintain our HOLD call on Pentamaster Corp (Pentamaster) with a higher fair value of RM3.52/share (previously RM3.24/share), pegged to a rolled-forward FY23F PE of 23x. The revised target PE, from an earlier 24x, represents a 0.5 standard deviation below the group’s 3-year average forward PE. We make no adjustment to our 3-star ESG rating.

• We reduce our earnings slightly by 6–7% to RM91mil in FY22F, RM109mil in FY23F and RM120mil and FY24F by lowering growth assumptions for the electro-optical segment, partly offset by an increase in the automotive division.

• Pentamaster’s 1QFY22 core profit of RM21mil increased 24% YoY and 52% QoQ. However, the results were slightly below expectations, coming in at 21% of ours and and 22% of consensus estimates.

• The automated test equipment (ATE) division continued to be the largest contributor to the group’s top line at 78%. ATE’s 1QFY22 revenue surged 62% YoY to RM131mil on the back of substantively stronger contribution from the automotive segment, which escalated 4.6x YoY, and accounted for 36% of group revenue. Meanwhile, 1QFY22 electro-optical sales, which contributed 30% of group revenue, declined by 32% to RM44mil due to lower smart sensor development.

• All in, ATE PBT improved 27% YoY and 33% QoQ to RM33mil. While the growth is commendable, the group indicates further upside could be attained, which was partly offset by cost pressures, key component shortages and higher logistics costs. Notably, the group’s inventory rose 19% QoQ and 2x YoY to RM86mil from management’s strategy of mitigating supply risk disruptions and longer lead delivery schedules.

• Sales for factory automated solutions (FAS) contributed 22% of Pentamaster’s 1QFY22 revenue, a slight decrease of 8.9% YoY. This was due to the timing of revenue recognition from projects, which inherently requires longer project lead time.

• Nonetheless, we remain upbeat on the FAS segment, driven by massive shift in trends towards factory automation in a postpandemic environment, and exacerbated by rising labour cost amid inflationary pressures. Despite the decrease in revenue, FAS PBT improved 62% YoY to RM3.6mil, compared to RM2.2mil in the previous year.

• While the stock is fairly valued with limited upside at its current price, Pentamaster’s robust outlook continues to be supported by its:
  (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) strategic position to capture strong growth in key EV markets, such as Japan.

Source: AmInvest Research - 13 May 2022