Investment Highlights

• We maintain HOLD call on Pentamaster Corp (Pentamaster) with a higher fair value (FV) of RM5.50/share (from RM4.64/share previously), derived from a rolled forward FY24F PE of 32x – 1 standard deviation above the 5-year mean - on revised EPS. We make no adjustment to our neutral 3-star ESG rating (Exhibit 6).

• We lowered FY23-FY24F earnings by 12%-24%, assuming lower sales assumptions after the group’s 2QFY23 results came up short of our expectation. 1HFY23 core net profit of RM48mil only accounts for 39% of our earlier FY23F earnings and 45% of consensus. As a comparison, 1HFY22 accounted for 49% of FY22 core net profit.

• YoY, 1HFY23 revenue improved 15%, on back of stronger sales from both automated test equipment (ATE) and factory automation solutions (FAS) divisions. 1HFY23 earnings improved by 11% due to better operational efficiency.

• The ATE division saw a 16% revenue boost in 1HFY23. This was driven by a remarkable 91% YoY growth in the automotive segment, more than compensating for declines of 49% YoY in the electro-optical and consumer electrical/industrials products divisions. These declines were due to limited smartphone sensor upgrades and a global deterioration in consumer electronics sentiments.

• The FAS division’s 1HFY23 revenue rose 13% YoY following strong demand from the medical segment. This segment surged to become a key revenue driver, contributing 41% (from 33% previously) of FAS revenue.

• QoQ, 2QFY23 revenue grew 7% to RM177mil due to stronger sales on ATE division (+34 QoQ), which more than offset the decline in FAS division (-48%). EBITDA margin improved by 2%-point to 24.4% due to better operational efficiency. However, 2QFY23 core net profit (after stripping off unrealised forex gain of RM5mil) fell 33% QoQ as FAS PBT margin fell 15%-point to 2% due to reduced economies of scale.

• Moving forward, we remain positive on the group’s long term prospects that continue to ride on the automotive electrification momentum, Industry 4.0 and IoT (internet of things) adoption. The company leverages on its i-ARMS (Intelligent Automated Robotic Manufacturing System) to provide automated solutions which streamline manufacturing processes and facilitate medical services.

• The group developed next generation silicon carbide (SiC) wafer burn in equipment with better durability and the ability to endure temperatures of up to 200 degrees. Additionally, it offers real-time voltage measurement and temperature monitoring features. This equipment, which tests temperature reliability stress on wafers, is primarily designed for the automotive segment.

• The stock looks fairly valued at current levels, trading at 29x FY23F PE, in line with its 4-year average.

Source: AmInvest Research - 11 Aug 2023