Investment Highlights

• We downgrade Pentamaster Corp (Pentamaster) to HOLD (from BUY) given the limited upside to our unchanged fair value (FV) of RM4.64/share following the positive share price performance. Our FV is based on 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 (Exhibit 8).

• We retain our forecasts as Pentamaster’s FY22 core net profit of RM86mil (+20% YoY) is largely in line with our and consensus expectations. It came in 5% below our forecast and 3% of street’s.

• The company reported a record revenue of RM601mil (+18% YoY), on the back of stronger sales from both automated test equipment (ATE) and factory automation solutions (FAS) divisions.

• ATE continued to be the group’s revenue driver, contributing 70% of FY22 topline. The division’s FY22 revenue grew 18% YoY, mainly attributed to the robust performance of the automotive segment (+1.5x YoY), driven by global vehicle electrification trends. The automotive segment contributed 58% of ATE’s FY22 total revenue, up from 28% in the previous year. In tandem with the increase in revenue, ATE division’s FY22 PBT improved by 2% YoY.

• The ATE division’s 4QFY22 PBT declined by 2% YoY, due to the increase in component and labour costs despite reported higher revenue (+10% YoY). QoQ, the division’s PBT improved by 12%, boosted by favourable forex movement and improvement in margin, likely due to better product mix.

• The FAS division’s FY22 revenue grew 19% YoY following strong demand from the medical device segment, particularly the group’s proprietary i-ARMS (intelligent Automated Robotic Manufacturing System) solutions. The medical device segment surged 2.6x YoY, contributing 42% (from 19% previously) of the division’s revenue. This translates into a stronger FY22 FAS PBT of RM49mil (+90% YoY).

• In 4QFY22, FAS PBT soared 2.8x YoY on the back of stronger revenue (+47% QoQ) and better margin due to favourable product mix. Based on the group’s order book mix as at end-2022, demand for FAS is gaining momentum with a growing share of 40% of total orders from 30% in 3QFY22.

• While we remain positive on the group’s prospects as demonstrated by its commendable results and strategy riding on the automotive electrification momentum, the stock looks fairly valued at current levels. The company is trading at 28x FY23F PE, near its 4-year average PE of 29x. Also, given that Pentamaster is currently running at full capacity, any FY23F revenue upside potential is likely limited to improvement in higher value-add projects and increase in productivity.

Source: AmInvest Research - 24 Feb 2023