Investment Highlights

• Pentamaster Corporation (Pentamaster) is mainly involved in the provision of automated test equipment (ATE) and automated manufacturing solutions (AMS). The group derives the bulk of its revenue from ATE (~80%), catering mostly for the telecommunications, semiconductor and automotive sectors.

• The group’s revenue is arguably recurring in nature given that the average upgrade cycle of its products is 2 years and it derives circa 20% of its revenue from after-sales maintenances/services. Due to the complexity and high value add, the company’s products command commendable profit margins – GPM ranged 28-32% in the past 3 years.

• We believe two main growth drivers for Pentamaster this year are smart sensors used in mobile devices and semiconductor components used in electric vehicles (EVs), e.g. power inverters and multilayer ceramic capacitors (MLCCs). The deployment of 3D sensors in mobile devices is expected to proliferate, sparked by the technology’s adoption by a prominent smartphone player – thus requiring more ATE. In addition, the growing popularity of EVs and its semiconductor content is also expected to fuel the demand for ATE.

• For the AMS segment, the group expects an increase in revenue contribution from 14% in FY17 to circa 25% this year, underpinned by AMS used for the production of consumer electronics and single-use medical devices, e.g. syringe.

• On top of potential new sales, the group has thus far secured purchase orders worth >RM300mil, the entirety of which is expected to be recognised this financial year. This is significantly higher than an order book of circa RM90mil in the beginning of FY17. In light of that, management has guided a robust double-digit growth this financial year.

• Due to significant business growth in FY17, the group has recently acquired a plot of land in Batu Kawan for the construction of a new production plant. The new facility, which has a production space of approximately 47.7K sq ft, will triple its existing production space of 23.5K. The plant is expected to commence operations in June 2018 and will mainly be used for the production of AMS.

• The company’s FY17 PE of 17.6x appears severely undervalued when compared with its peers. Currently, Vitrox trades at 29.9x, Fanuc at 29.0x and Kuka at 41.3x.

BUSINESS BACKGROUND

Pentamaster Corporation (Pentamaster) is mainly involved in the provision of automated test equipment (ATE) and automated manufacturing solutions (AMS).

The company’s ATE cater mostly for smart sensors used in mobile devices, power inverters and multilayer ceramic capacitor in electric vehicles (EVs), and other semiconductor components. After the listing of its ATE arm in Hong Kong in January 2018, the group’s effective stake in the business was diluted to 63.1%.

Under the AMS segment, the group customises and automates various stages of its customers’ manufacturing processes. The products cater for various industries including telecommunications, consumer electronics, food and beverages as well as medical devices.

In FY17, the ATE segment contributed circa 82% of the group’s turnover, while AMS contributed 14%. The remainder is derived from smart control solution system and other corporate adjustments.

KEY RISKS

• Rising labour cost and shortage issues 

Rising wage costs and shortage of engineers could be a major issue to Pentamaster. Management has indicated that on average, every engineer generates RM1mil in revenue for the group. Fortunately, the group is based in Penang where most of Malaysia’s electronics companies and engineers are centred, thereby providing the group with a good ecosystem for the sourcing of talents.

• Escalating raw material prices and shortage issues

Rising input costs and a shortage of raw materials could be detrimental to Pentamaster’s profit margins. To overcome the bottlenecks, the group is engaging a broader supplier base for the sourcing of raw materials, e.g. from China.

• Lukewarm demand for end-products owing to weak economic conditions

The group derives the bulk of its revenue from the telecommunications (e.g. mobile devices), semiconductor and automotive segments. Therefore, the group’s earnings are susceptible to a lukewarm demand for such endproducts amid economic conditions. However, we believe the rising semiconductor content in vehicles and mobile devices would mitigate the risk.

Source: AmInvest Research - 10 Apr 2018