WHILE the semiconductor industry has had a relatively lacklustre year so far, Penang-based Pentamaster Corp Bhd’s share price has almost doubled to RM1.46, thanks to stronger earnings. In the first half of the year, its revenue grew 55% year on year to RM67.45 million while net profit shot up 97% to RM9.83 million.

At its current level, Pentamaster is valued at 11.7 times earnings. By comparison, other semiconductor players have valuations of 10 to 30 times. Inari Amertron Bhd, for example, is trading at 21.8 times earnings.

On top of that, Pentamaster has net cash of 17.3 sen per share. Stripping out the cash, the company’s valuation is even more attractive at 10.2 times earnings.

Nonetheless, Pentamaster will have to prove that its current level of earnings is sustainable in order to justify further upside, especially after the recent rally in its shares.

After all, the company’s earnings track record has been volatile (see charts).

“We have seen more work from the segments we are in — automotive and smart devices, including smartphones. Based on the contracts we have secured and expect to secure, we see our top and bottom line expanding 50% to 60% this year,” chairman and co-founder Chuah Choon Bin tells The Edge.

He points out that unlike other semiconductor players, Pentamaster has been moving up the value chain with more emphasis on R&D-led value add as opposed to a high-volume, low-margin game.

Pentamaster manufactures purpose-built automation equipment for smart devices, including equipment to test smart devices coming off a production line for quality control purposes.

“Smart devices are becoming increasingly complex. It is very different from conventional IC (integrated circuit). Nowadays, devices have all sorts of sensors — gyroscope, light, pressure and humidity sensors — and microphones and cameras,” explains Chuah.

Not only does this increase demand for automation equipment but the complexity and sensitivity of the equipment is also higher.

The word is that Pentamaster is servicing some of the largest smartphone makers in the world. However, Chuah declines to reveal the company’s client list due to non-disclosure agreements.

Nevertheless, over 90% of the group’s equipment is exported. While the weaker ringgit has helped boost revenue, it has also increased costs as many of the group’s inputs still need to be sourced from abroad.

It is noteworthy that Pentamaster does not have any real competitors in the domestic market and competes with international companies many times its size.

“It is not like we have won a huge contract. We have just been consistent in securing contracts this year. Normally, our earnings are volatile because the contracts are piecemeal. But this year, we have had some orders of larger volume,” says Chuah.

Typically, the company’s visibility of new contracts is quarter on quarter but recently, there has been a steady stream of work, he adds.

In its third quarter ended Sept 30, Pentamaster saw a similar earnings growth as in the first half of the year, says Chuah. “Things will slow down in the fourth quarter but that is because of the Christmas rush. The pace will pick up again in the first quarter of next year,” he adds.

Chuah also points out that Pentamaster’s margins have been improving. In the first half of the year, its automation equipment segment, which accounts for 75% of revenue, enjoyed a net margin of 15.3% — up 2.8 percentage points year on year.

A potential deterrent for investors considering Pentamaster would be the absence of dividend payments, at least in the immediate future.

The company has a cash pile of RM25.4 million but Chuah does not plan to pay dividends any time soon. Instead, the money will be reinvested in a new plant that will increase the group’s production capacity by 50%.

“We are looking to build a new plant in Batu Kawan, where we will move all our manufacturing operations. We will use our existing facility in Bayan Lepas for R&D purposes,” explains Chuah.

The new plant is estimated to cost RM25 million and will be completed in the second half of next year.

“In the past, we used to have more borrowings. But when the times are tough, the banks are quick to cut the line. I find it is better not to rely too much on borrowings. I would rather use the cash to expand the business than pay dividends for now. But once we stabilise, we will look to reward the shareholders,” says Chuah.

As at June 30, Pentamaster only had RM533,000 of short-term borrowings and zero non-current borrowings.

Nevertheless, the company completed a share placement of 10% or 13.32 million shares in late April. Chuah remains the largest shareholder of the company with a 22.51% stake while CEO Chuah Chong Ewe (no relation) has a 4.67% stake.

Looking ahead, Chuah says the biggest challenge for Pentamaster and the broader semiconductor industry is lack of talent.

“Right now, the biggest problem we face is getting enough good engineers. When we want to do R&D, we need good engineers. [Lack of talent] can make us uncompetitive. We’re no longer worried about cheap labour because everything is automated,” he explains.