Global worker shortage that will drive automation demand. Pentamaster (PENTA) designs, manufactures and installs automated equipment in the semiconductor, pharmaceutical, medical devices, automotive, food & beverages, and consumer goods industries globally. In the wake of persistent concern of global workers’ shortage (source), many companies have resorted to automation and advanced technology to improve efficiency and reduce labour dependence. We reckon PENTA is well positioned to ride on the growing demand for automation, given that factory automation solution (FAS) is one of the group's major contributors, accounting for 30.6% of the group 3QFY21 revenue. During an interview by The Edge (source), PENTA’s management expects the revenue contribution from the FAS division to grow from 30% to 35% going forward.

Automated test equipment (ATE) division to grow steadily. On the back of record high equipment spending, PENTA’s ATE division is expected to grow from its electro optical and semiconductor segment that has experienced a robust demand due to the recovery of smartphone demand and peripheral markets. On the other hand, the automotive segment where PENTA have high exposure through encompassing diverse product areas will continue to pick up after recent setback, driven by the advent of electrification and other technology advancements.

Brace for a rebound. Global technology stocks experienced a knee-jerk sell down as investors rotated away from high growth pricey technology stocks to value and cyclical stocks, amid potential knock-on effects on growth following the Fed hawkish stance to tame inflation and heightened geopolitical tensions. Overall, KLTECH had plunged 18.05% YTD, being the worst-performing sector in Bursa Malaysia.

Mirroring KLTECH, PENTA’s share price tumbled 26% to RM4.10 yesterday. However, we expect the stock to stage a technical rebound from a steeply oversold positions , underpinned by bottoming out indicators. A decisive breakout above RM4.35 could spur prices higher towards RM4.47-4.59-4.71 zones. Cut lost at RM3.80

Source: Hong Leong Investment Bank Research - 27 Jan 2022