Investment Highlights

• We upgrade our call on Pentamaster Corp (Pentamaster) to BUY from HOLD with a higher fair value of RM4.03/share (previously RM3.52/share), pegged to an unchanged FY23F PE of 23x. The target PE is 0.5 standard deviation below the group’s 3-year average forward PE of 31x. We make no adjustment to our 3-star ESG rating (Exhibit 3).

• While our FY22F earnings remain largely unchanged, we raise our forecast earnings by 14–16% to RM125mil in FY23F and RM139mil in FY24F. This is premised on the group’s stronger-than-expected order book growth and higher average selling price (ASP), which enable the group to maintain its EBIT margin of 23% in the current inflationary environment, subsequently stabilising at 25% from FY23F onwards.

• We attended Pentamaster’s 1QFY22 investors briefing last Friday, and here are the key takeaways:
  • Pentamaster’s order book grew 2.5x YoY, reaching an all-time high of RM500mil as of May 2022. 70% of the order book secured are by the automated test equipment (ATE) division, while the remaining 30% are from factory automated solutions (FAS). By industry segmentation, 40% of the order book are contributed by the automotive division.
  • Barring any unforeseen circumstances, the group expects the order book to be recognised in 6 to 9 months’ time, as communicated to its customers. Of the RM500mil order book, we learned that 60% are derived from new customers’ orders, which the group managed to negotiate for higher ASPs of up to 12%. We have factored in the higher ASP into our FY23F–24F revenue assumptions.
  • The group’s rising automotive segment will continue to drive the group’s growth, which management guided that its top 5 customers are in this division. Together, they contributed 58% of the group’s 1QFY22 total revenue.
  • Meanwhile, more than 40% of Pentamaster’s 1QFY22 revenue are derived from China. However, while local regulators remain committed to the zero-Covid policy, the group view the impact as mostly mitigated by its diversified customer base in China as the lockdown is largely limited to Shanghai. To note, the group also has customers in Suzhou, Shenzhen, Beijing and Chengdu.
• In terms of capex, the group acquired a piece of leasehold land in Batu Kawan for RM28mil for its Campus 3 expansion. The proposed facility will add 600K sq ft of production space to cater for the growing FAS and medical devices segment, enabling Pentamaster to achieve its aspiration of 20% topline growth YoY to reach RM1bil by FY25F. Presently, the group’s headquarters has 140K sq ft for a design centre and prototyping while Campus 2 has 97K sq ft for contract manufacturing.

• The management foresees Phase 1 of the Campus 3 to be completed by 1H2023 with Phase 2 in 2H2023. Furthermore, the group will be setting up a Germany office in 2H2022 in order to be closer to its customers and is looking into Middle East and Indonesia expansions for its warehouse solutions, riding on the regions’ growing ecommerce.

• The stock currently trades at a bargain FY23F PE of 20x, substantively below the 3-year average PE of 31x. We are upbeat on the group’s prospects, as demonstrated by its commendable results and growth in the automotive segment. 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) robust offerings in automotive segment, which is able to provide solutions for both front-end and back-end customers.

Source: AmInvest Research - 17 May 2022