We downgrade Pentamaster to Hold (from Buy) following its 9M24 core earnings (-15% YoY) miss. Until the group can secure new concrete revenue drivers, we forecast gradual growth ahead. Management’s target to achieve RM1bil revenues have been pushed back by a year to 2026. We expect medical device revenues growth to normalise, unless sizeable new customers come on board. Hindered by overcapacity in the SiC (silicon carbide) sector, we also forecast a modest rebound in automotive revenues. Changing coverage, we cut earnings by 17-38% and FV to RM3.50 (from RM5.50).
 

• Downgrade to Hold (from Buy). Changing analyst coverage, we cut earnings by 18-38% (see Exhibit 5). With this, our FV is lowered to RM3.50 (from RM5.50 previously). We use a target PE of 24x, which is one standard deviation below the group's 5-year average. While we believe share price has bottomed, upside is unlikely to materialise, on account of more gradual growth ahead, until the group is able to secure new concrete revenue drivers.
• RM1bil revenue target delayed to 2026 (from 2025). This is not a surprise. In fact, our forecasts are more conservative, as we impute 2025 and 2026 revenue growth of 9% and 10%. We expect the group to record revenues of RM833mil for 2026. Key to our assumption are a normalisation of medical devices revenue growth (FY25F: +9% YoY) and a modest rebound (from 2H25 onwards) in automotive revenues (FY25F: flat YoY). While medical devices revenues exhibited good growth in 2024, it has primarily been driven by a single blood glucose monitoring customer. To sustain its growth momentum, the group will need to secure new sizeable medical devices customers. Meanwhile, we opine the automotive segment could take a longer time to recover, due to overcapacity in the SiC sector.
• Order book has bottomed. 9M24 core earnings (-15% YoY) missed expectations, forming 66% of consensus estimates. Positively, order book appears to have bottomed and grew +5% QoQ to RM420m (see Exhibit 2). Albeit not in a big way, new automotive orders are slowly trickling in. The electro-optical segment is also seeing renewed activity, driven by developments for new optical and proximity sensors.
• Campus 3.0 nearing completion. Preparing for future needs (to expand factory automation solutions and MediQ), the 720k sqft facility is expected to be operational by 1Q25. Management estimates 50% of the site should be occupied next year. As activities in Campus 2.0 (100k sqft) will be consolidated to the new site, there are plans to eventually lease it to generate rental income. Campus 1.0 (140k sqft) will continue to house its automated test equipment business.

Source: AmInvest Research - 11 Nov 2024