Investment Highlights

• We maintain HOLD call on Pentamaster Corporation (Pentamaster) with an unchanged fair value (FV) of RM5.50/share, derived from FY24F PE of 32x – 1 standard deviation above its 5-year mean. We make no adjustment to our neutral 3-star ESG rating (Exhibit 5).

• Our forecasts are maintained following an analyst briefing on last Friday. Key takeaways include: 
  • The company is confident that 2HFY23 sales will be better than 1HFY23 from better expected contribution from automotive and medical device segments.
  • According to Modor Intelligence, automotive semiconductor market is projected to grow at a 5-year CAGR of 14.4% to USD140bil by 2028. This growth will be propelled by supportive government policies and the increasing adoption of hybrid and electric vehicles in USA and China. As a result, the automotive sector is poised to remain the primary revenue driver for the group, surpassing 45% of FY23F revenue (which is line with our assumption of 49%), compared to 58% in 1HFY23 and 42% in FY22.
  • We also understand that the group expanded its clientele in this segment up to 40 customers (from 5 in FY21), primarily from USA (33%), followed by China (29%), Vietnam (25%), and Japan (4%). A significant boost of 40% of automotive sales in 1HFY23 came from its silicon carbide (SiC) wafer burn-in equipment. Management’s ongoing focus involves elevating machine capabilities to test multiple bare wafers simultaneously to improve efficiency.
  • The group foresees the semiconductor segment, expected to contribute 15% of FY23F group sales, will continue sustaining sales throughout the year. The group will continue to innovate with emerging new chip advancements to further expand its customer base.
  • The group guided that its electro-optical segment remains soft and sluggish. Hence, this segment’s contribution is expected to decline to 10%-12% of FY23F group revenue (vs. 20% in FY22). The group expects this segment’s sales to recover in 2HFY24 on the development of new ambient light and pressure sensors for the latest series of smartphones and smart watches.
  • The medical device segment, which contributed 10% of 1HFY23 sales, is buoyed by a robust estimated 2HFY23 orderbook of RM270mil (3.9x FY23F segment revenue). This also drives the factory automated solutions (FAS) division. Notably, this involvement in automated moulding and surface-mount technology in continuous glucose monitoring (CGM) for a leading multinational customer highlights the group’s automotive prowess. Looking ahead, management aims to expand client base by introducing various FAS options, catering to emerging prototypes like cardiac monitoring systems, solidifying the group’s foothold in evolving medical technologies.
  • Pentamaster revised the construction cost for its 3rd plant in Batu Kawan, Penang to RM300mil (from RM200mil) to provide a larger production space of 630k sq ft (from 600k sq ft) for its FAS and medical device segment. The 1st phase of the third plant is scheduled for completion in 2H2023, and 2nd phase in 1H2024. Additionally, a strategic regional office, just established in Munich, Germany in 2QFY23, provides service support for improving sales prospects in Europe.
• The stock looks fairly valued at current levels, trading at 29x FY23F PE, in line with its 4-year average.

Source: AmInvest Research - 14 Aug 2023