Investment Highlights

• We maintain our BUY call on Pentamaster Corp (Pentamaster) with an unchanged fair value of RM4.64/share, pegged to an FY23F PE of 27x, at parity to the group’s 3-year forward average. We make no adjustment to our neutral 3-star ESG rating.

• We remain upbeat on Pentamaster’s prospects after attending its 3QFY22 investors briefing last Friday. Therefore, we retain our earnings forecast. Here are the key takeaways from the briefing:
  i. The group’s order book has exceeded previous quarter level of RM500mil with the book-to-bill ratio hitting 1.4x. The order book mix also has changed as demand for its factory automated solutions (FAS) gained momentum. 40% (from 30% in 2QFY22) of the order book now are from FAS while 60% are for automated test equipment (ATE).
  ii. The expected decline in the electro-optical demand is likely to continue in 4QFY22 due to lack of major upgrades in smartphone sensor technology. However, demand is expected to pick up in 2HFY23 following the introduction of an improved version of the magnetometer sensor, driving the need for Pentamaster’s equipment.
  iii. Nevertheless, robust demand from the automotive industry will be the bright spot for Pentamaster in 2023 as it continues to ride on the tailwinds of vehicle electrification. As the automotive customer base has exceeded 30 with a well-diversified geographical presence, this segment is expected to contribute more than 45% of the group’s FY23F revenue.
  iv. The medical devices segment’s revenue breakout (+1.1x QoQ, +2.9x YoY) in 3QFY22 is the result of sales contribution from recently onboarded new customer(s) and the momentum is expected to continue in 2023. Over the longer term, this segment could be the company’s next revenue growth driver following the growing demand for wearable healthcare devices.
  v. The construction of Pentamaster’s Campus 3 expansion is on track to meet the company’s earlier guided timeline of Phase 1: 2H2023 and Phase 2: 1H2024.

• All in, we remain positive on the group’s prospects as demonstrated by its commendable results and strategy to ride on the global momentum for automotive electrification. Pentamaster’s robust outlook continues to be supported by its portfolio diversification efforts across market segments and expansion of customer base.

• The stock currently trades at a compelling FY23F PE of 22x vs its 5-year mean of 31x.

Source: AmInvest Research - 7 Nov 2022