• Reaping fruits from its diversification. An established automated equipment manufacturer with diversified exposures to various sectors. To recap, over the last 5 years, PENTA has developed new automation solutions and products for industries other than the semiconductors, such as medical gloves, F&B, LED, logis tics , automotive and RFID. The effort had reduced PENTA’s dependence on semiconductor industry from over 80% prior to 2013 to below 50% targeted for 2016.
• Strong US$ is a boon for PENTA. PENTA is also a beneficiary of the strong US$ (vs. RM) as approximately 80% of its revenue is denoted in US$ against 20% of its raw materials costs denominated in US$. Although Ringgit has strengthened 7.8% (vs. US$) from 52-week high of RM4.48, it is still 18.1% weaker YTD.
• Better 3Q15 results expected. PENTA’s 3Q15 res ults are likely to be released before mid-Nov. We expect marginal topline growth with healthy bottomline qoq due to better product mix, seasonal year-end factors, forex gains and cost savings.
• Target at least 20% earnings growth for 2016. Overall, PENTA remains positive on business outlook and expect at least 20% growth going forward. The earnings ’ drivers are as follow:
  • Semiconductor: Despite experiencing some softness in semiconductor sector in 2H15, management expects semiconductor segment to make a comeback in FY16 given newer and shorter product life cycle as some products are undergoing prototyping and qualification phase now and production to start in 2016/2017.
  • Medical gloves: Management expects increased packaging and handling equipment orders from major healthcare companies. Total contribution from this segment is expected to increase from 5% in 2013 to 15-20% in 2016.
  • Logistics: Food handler for the aviation and airport industry.
  • Consumer electronics: Automated Testing system (to test air flow, temperature, noise) for a major consumer company for its hairdryer products.
  • Ceramic oven: To manufacture 40-50 units pa for the pharmaceutical/medical industry
• Recent acquisition of Origo for RM5.8m to venture into Smart Home and Building Solutions. On 28 Sep, PENTA acquired a property project management company which currently engaged in a mixed development project in Kota Bharu with guaranteed fee of RM10m. Upon the completion of the proposed acquisition, PENTA is expected to benefit from Origo’s platform to s howcase its Smart Home and Building Solutions’ offerings , given the huge potentials from growing IoT concepts (home automation/surveillance, security, energy, lighting etc).
• We see the proposed acquisition value enhancing and synergistic with the benefit arising from its interoperability among solutions from different brands by using its own proprietary software (i.e low CAPEX) coupled with the expectations of increased contribution from recurring income based on long term operation and maintenance contracts.
• Upon leveraging on Origo’s experience, Management expects to expand its Smart Home and Building Solutions to other enterprise/corporate segments such as malls, hospital, factories, etc with the aim of obtaining about RM20-30m contract in FY16 with target GP margin of 15%. Currently, PENTA is in discussion stage with another development in KL. Management expects Smart Home and Building Solutions to contribute approximately 20% to o verall group’s revenue starting 2017-2018.
• Batu Kawan’s expansion. Total costs (to be funded through a combination of internally generated funds and bank borrowings) are approximately RM20m (Land: RM5m and plant construction: RM15). The plant will be completed in 2017, and will enhance the current floor space from 110k sq ft in Penang to another 100k sq ft in Batu Kawan, catering for the ceramic oven and proprietary products.
• Grossly oversold. From YTD high of RM0.915 on 24 July, PENTA’s s hare prices tumbled 32.2% to a low of RM0.62 on 25 Aug before closing at RM0.78 yesterday. At RM0.78, PENTA is trading at undemanding valuations of trailing 11.3x P/E (12.9% below peers ’ 13x) and 1.6x P/B (43.1% discounts against peers ’ 2.8x). We believe such valuations have provided a sufficient margin of safety and cushion further sharp share price decline, supported by grossly oversold daily indicators.
• Currently, the stock is building its base near RM0.75 (100-d SMA). If PENTA share prices can swing past immediate resistance near RM0.80 (61.8% FR and downtrend line), the next upswing should lift prices towards RM0.845 (76.4% FR) and our LT objective at RM0.915, supported by bottoming up indicators.
• Aggressive traders may start to nibble now. Key supports are RM0.76 (50-d SMA) and RM0.73 (38.2%). Cut loss at RM0.72.

Source: Hong Leong Investment Bank Research - 16 Oct 2015