Investment Highlights

• We upgrade our call on Pentamaster Corp (Pentamaster) to BUY from HOLD with an unchanged (FV) of RM5.50/share, based on a rolled-forward FY25F PE of 26x – at parity to its 5-year mean. We make no adjustments to our neutral 3-star ESG rating .

• We maintain FY24F-FY25F earnings as FY23 core net profit of F RM91mil came within expectations, 4% below our forecast and consensus estimate. We introduce FY26F net profit with a 14% .6 growth premised on revenue expansion of 16%. .8 .

• YoY, FY23 revenue improved 15% on the back of stronger sales .7 - from both automated test equipment (ATE) and factory .0 automation solutions (FAS) divisions. Partly offset by a 66% .3 increase in depreciation on higher capex spending, 9MFY23 .7 earnings increased by 5% YoY. .4 .

• ATE division saw a growth of 7% YoY in FY23 revenue. This was m driven by a strong revenue growth of 29% YoY from automotive products, wafer level burn-in tester for silicon carbide and back- end assembly and test solution for hybrid pack power modules. However, it was partially offset by a decline in segmental sales of electro-optical (-44% YoY) and consumer electrical/industrials products (-24% YoY).

• The lower revenue for these segments was due to dampened consumer demand amid high inflation and interest rates as well as limited new features to incentivise smart phone upgrades.

• The FAS division’s FY23 revenue rose 33% YoY following stronger demand from the medical segment (+75% YoY) and higher orders for i-ARMS (Intelligent Automated Robotic Manufacturing System).

• QoQ, 4QFY23 revenue declined by 7% to RM169mil due to contractions in revenue contribution from ATE (-5% QoQ) and th FAS (-4% QoQ) divisions. The slight declined in both divisions 3) likely stemmed from delays in revenue recognition and 7) deferment of shipment of automotive segment. However, 4QFY23 core net profit rose 22% QoQ to RM23mil due to better production efficiency as gross margin improve 1.4%-point to 31.6% coupled with lower depreciation (-15%) and mild positive tax charge.

• Moving forward, we remain positive on the group’s long-term prospects that continue to ride on the revenue momentum of the automotive and medical technology (medtech) sectors. The group will focus on expanding its footprint in Japan, China and Taiwan to provide silicon carbide (SiC) wafer burn-in equipment as these countries are the leaders in high-end automotive technology.

• Pentamaster is constructing its 3rd plant spanning 720k sq ft for the FAS and medical segments with a substantive RM300mil capex, expected to be completed by 1QFY25.

• The stock valuation is attractive at current levels, trading at 22x FY25F PE vs. its 5-year average of 26x.

Source: AmInvest Research - 23 Feb 2024