Investment Highlights

• We maintain BUY call on Pentamaster Corp (Pentamaster) with an unchanged (FV) of RM5.50/share, based on FY25F PE of 26x – at parity to its 5-year mean. We make no adjustments to our neutral 3-star ESG rating (Exhibit 6).

• Our forecasts are maintained following an analyst briefing last Friday. Key takeaways include:

• Pentamaster’s current orderbook slid by 18% QoQ to RM450mil as at 4QFY23 from RM550mil in 3QFY23 mainly due to lower replenishment orders from automotive segments. This leads to a book-to-bill ratio of 0.6x FY24F revenue. We understand that the orderbook from medical segment were higher than the higher-margin automotive segment.
   
• In the short term, we remain cautious on the automotive segment as sentiments remain soft due to high interest rates being sustained for a longer period of time. This is likely to dampen potential consumer spending on EV vehicles due to high borrowing cost and higher selling prices compared to conventional vehicles. Based on the current orderbook, the company is looking at a lower automotive share at 30%-35% of FY24F revenue vs. 45% in FY23.
   
• However, we believe that Pentamaster’s longer-term order book trajectory could improve in the automotive segment, driven by:
  
  (i) increase in clientele base to 45 customers in 4QFY23 from 30 clients in 1HFY23, and
  
  (ii) continued strengthening foothold in China’s automotive segment as the market is still robustly growing. Despite short-term setbacks from slower global economic growth prospects, we remain optimistic on the automotive segment outlook over the longer term.
   
• The medical segment will continue to grow in FY24F, which could partially offset the muted growth in other segments. Pentamaster expects the contribution from this segment to expand to 30-35% of total FY24F revenue vs. 21% in FY23 due to robust growth in the medical industry. Pentamaster is engaging with 2 new US-based medtech customers to secure more orders, with new revenue contribution potentially by 2HFY24.
   
• We are positive on the medical segment’s growth, which is expected to be propelled by: (i) increase in orders from existing customer base for both new and existing medical products as existing customers continue to expand their product portfolios and factory expansions in other countries, and (ii) active expansion of client portfolio, including new customers.
   
• The medical segment will continue to grow in FY24F, which could partially offset the muted growth in other segments. Pentamaster expects the contribution from this segment to expand to 30-35% of total FY24F revenue vs. 21% in FY23 due to robust growth in the medical industry. Pentamaster is engaging with 2 new US-based medtech customers to secure more orders, with new revenue contribution potentially by 2HFY24.
   
• We are positive on the medical segment’s growth, which is expected to be propelled by:
  
  (i) increase in orders from existing customer base for both new and existing medical products as existing customers continue to expand their product portfolios and factory expansions in other countries, and
  
  (ii) active expansion of client portfolio, including new customers.
   
• Pentamaster expects the semiconductor segment to remain steady with 10%-15% to revenue contribution in FY24F vs. 15% in FY23. Meanwhile, the electro-optical, consumer & industrial segments remain soft and volatile. We expect these segments to improve gradually in 2HFY24, riding on the technology recovery cycle.
   
• Pentamaster also developed its own Known Good Dies (KGD) tester for wafer test solution, which has higher power performance and improves production efficiency required by customers. Pentamaster expect this product to be launched in 2HFY24.

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

Source: AmInvest Research - 26 Feb 2024