• 4Q23 results were in-line with our estimates, with better medical and general semiconductor performances cushioning the slowdown in auto.

• Management guides for c.15% revenue growth in FY24F, implying its medical segment revenue needs to grow by c.70% to offset the decline in auto.

• Maintain Hold with a lower GGM-derived TP of RM4.65, as valuation of 30.6x FY24F P/E appears steep amid potential downside from non-medical areas.

4Q23 core net profit up 19% yoy

The 4Q23 quarter reflected a few key trends: 1) some ramp up in the semiconductor and consumer electronics sequentially, driven by the broader semiconductor industry recovery towards end-2023, 2) decent medical revenue growth trend as Pentamaster continues to roll out its factory automation solutions for its main customer (Fig 2: +49% yoy in 4Q23, +75% in FY23), and 3) sequential slowdown in the automotive segment as key customers are less committal on new orders given the demand slowdown in EV (Fig 2: down 17% qoq in 4Q23). The results met our expectation at 97% of our FY23 forecast.

Medical to anchor 15% revenue growth and margin expansion

Notwithstanding the near-term softness from the automotive segment, the management remains upbeat on its medical segment to anchor its targeted c.15% revenue growth for FY24F. Management said during the briefing that its main medical technology (MedTech) customer in Penang will likely continue to contribute >80% of its medical segment revenue in FY24F, whilst complemented by small prototype orders for two other MedTech customers that it recently acquired. On the flipside, the electric vehicle demand softness has resulted in diminishing orderbook replenishment since 4Q23, and this may persist until mid-2024, in our view. Overall, management guides the medical revenue mix rising from 21% in FY23 to 30-35% in FY24F, while the automotive revenue mix may decline from 48% in FY23 to 30-35% in FY24F. This implies that the medical revenue needs to grow by c.70% to more than offset the decline in auto to achieve overall revenue growth of 15% in FY24F. We have factored in a 60% rise in medical revenue for FY24F, as we also take into factor additional revenue contribution from its new single-use medical device segment, though we are wary that margins may be impacted by start-up cost. Our FY24-25F EPS is largely unchanged, and we also introduce FY26F estimates. We project a 3-year FY23-26F EPS CAGR of 20%.

Maintain Hold with a lower TP of RM4.65

We retain our Hold call with a lower GGM-derived TP of RM4.65, as we apply a lower LTG of 5.0% from 5.5% to reflect near-term earnings risk from the automotive slowdown and medical-related start-up costs. Valuations also appear steep at 30.6x FY24F P/E, which is above its 8-year average of 23x and pre-covid mean of 11x. Upside risks include: 1) sharp recovery in its auto and mobile-related ATEs, 2) rapid market share increase in its medical device and equipment business, and 3) strong contribution from new businesses. Downside risks are prolonged weakness in the auto segment and margin compression from MediQ.

Source: CGS-CIMB Research - 28 Feb 2024