Investment Highlights

• We maintain our 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 made no adjustment to our neutral 3-star ESG rating (Exhibit 5) and earnings forecast.

• Our forecasts are maintained following an analyst briefing last Friday. Key takeaways include:
  • Pentamaster’s current order book slid 10% to RM550mil as at 3QFY23 from RM610mil in 2QFY23 mainly due to lower orders from the automotive segment. Orders from the automotive and medical segments account for an estimated 70% of the current total. We understand that the new orders from the medical segment were higher than automotive. This leads to a book-to-bill ratio of 0.7x against FY24F revenue.
  • To recap, the automotive segment’s revenue dropped 30% QoQ in 3QFY23, mainly due to softer demand. Management guided that 20% of the shipments or orders for this segment have been requested by customers to be deferred in 3QFY23. These orders are likely to be delivered by 1HFY24 as we expect a recovery in demand from the emobility industry.
  • In the short term, we are cautious on the automotive segment as sentiments could be softer due to high inflation and interest rates being sustained for a longer cycle. These are likely to dampen potential consumer spending on EV vehicles, which have higher price points vs. conventional marques. We also understand that automotive sales growth in Europe will not be able to catch up with the worse-than-expected slowdown in China. Despite short-term setbacks from slower global economic growth prospects, we remain optimistic on stronger prospects for the automotive segment in the longer term.
  • On a brighter note, the medical segment will continue to see growth in subsequent quarters, which could partially offset the slowdown in other segments. Management is engaging with 2 new US-based medical technology customers to secure more orders. Development of new medical equipment prototypes for new and existing customers are expected in FY24F and this is likely to see a significant improvement in revenue contribution from this segment in FY25F.
  • We are positive on the medical segment’s growth, which is expected to be propelled by: (i) increase in orders from existing customer base from both new and existing medical products as existing customers continue to expand their product portfolio and factory expansions in other countries, and (ii) active expansion of client portfolio to include new customers.
  • Besides the automotive and medical sectors, the balance 30% of the order book are orders from semiconductor, electro-optical, and consumer/industrial products segments. Management guided that sentiments remain sluggish and expects significant improvement in contributions from these segments only in 2HFY24 or FY25.
  • Pentamaster has its revised plans to expand the group’s production space to 720k sq ft from 600k sq ft over 2 phases with a capex of RM300mil for the factory automated solution (FAS) and medical device segments. The 1st phase of its third plant is scheduled to be completed by the end of 2023 with the construction work for the 2nd phase to be finalised by 1H2024.
• The stock is seen as fairly valued at current levels, trading at FY24F PE of 29x, in line with its 3-year historical average.

Source: AmInvest Research - 6 Nov 2023