Investment Highlights

• We maintain our BUY call on Pentamaster Corp (Pentamaster) with an unchanged fair value of RM4.03/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).

• Our earnings forecast is maintained following an undertaking by Pentamaster to subscribe for 29.9% of Everready Precision Industrial Corp’s (EPIC) enlarged equity stake for a total consideration of US$6.8mil. The purchase price will be offset against outstanding receivables owing to Pentamaster via loan conversion with no assumption of contingent liabilities.

• EPIC principally operates in Taiwan and is engaged in electrooptical operations, in which Pentamaster has a 30% revenue exposure based on its 1QFY22 results. EPIC specialises in designing and manufacturing end-to-end optical integration solutions and components, such as advanced optical precision moulds and lenses.

• While the proposed subscription is expected to increase Pentamaster’s geographical presence in Greater China, and at the same time vertically integrating its electro-optical segment, we do not expect EPIC to contribute meaningfully to the group’s bottom line in near term.

• EPIC booked a loss after tax of RM3.8mil in FY21. Considering Pentamaster’s stake of 30%, this translates to a slight -1.6% of Pentamaster’s FY21 profit after tax of RM73mil.

• The optoelectronics market is expected to grow at a compounded annual growth rate (CAGR) of 10.3% to US$9.8bil by 2026. While the applications and demand involve a wide user market, we remain cautious on growing competition in the optoelectronic space. Notably, the group’s 1QFY22 electro-optical sales declined 32% YoY.

• Nonetheless, we remain upbeat on Pentamaster’s prospects, particularly from the growing automotive segment. The group’s robust outlook continues to be supported by its:

(i) Portfolio Diversification Efforts Across Market Segments and Expansion of Customer Base;

(ii) Growth in Factory Automation Solutions, Supported by the Adoption of Industry 4.0; and

(iii) robust offerings in the automotive segment, capable of providing solutions for both front-end and back-end customers.

Source: AmInvest Research - 5 Jul 2022