Valuation / Recommendation

We initiate coverage on Pentamaster Corporation Berhad with a BUY recommendation with a TP of RM4.68 based on FY23F EPS of 14.5 sen and a PE of 32.3x, in line with the 5-years average. We like the stock for its attractive expansion plans and solid track record. The target price represents a potential return of 30.0% from the current price.

Investment Highlights

Diversified revenue stream and vast geographic footprint. Pentamaster serves customers across various industries such as the electro-optical, automotive, consumer and industrial products, semiconductor, and medical devices industry. Having geographic footprints across 14 countries, the company plans to expand its presence into the Greater China region and penetrate into key automotive markets in Japan and Germany moving forward.

Expansion into the medical segment. In FY19, Pentamaster acquired TP Concept which specializes in the design and manufacturing of insulation displacement connection (IDC) machines. Subsequent to the acquisition, the company plans to leverage on the know-how of TP Concept, and venture into manufacturing of medical products after the establishment of Pentamaster MediQ in FY20. The company is building a 3rd plant in Batu Kawan with a built- up area of 600k sq ft, which is approximately 3x larger than its existing production floor space, expected to complete within 1H24.

40% of the space will be allocated for the medical segment with the installation of clean rooms and production lines, and the remainder space will be utilized for the factory automation solution (FAS) segment. Pending the approval from the Malaysia Device Authority (MDA), the company expect the medical products from MediQ to contribute positively to group revenue in FY23. We think that with the completion of the 3rd plant in FY24, the company is well-positioned to grow its medical segment and achieve its targeted RM1bn revenue by FY25, leveraging on the medical device industry which is estimated by Protégé to grow at a 5-year CAGR of 14% from 2021 to 2026.

Strong order book and solid track record. The company has an order book of RM500m, expected to be fully recognized between 4Q22 and 1Q23. Under the leadership of Chairman Chuah Choon Bin who has more than 30 years of experience in the design and manufacturing of automation equipment and vision inspection system, the company was able to achieve a revenue record in FY21, and a 5-year revenue CAGR of 29.1% from FY16 to FY21, despite the COVID- 19 pandemic in FY20.

Risk factor. (1.) Fluctuation of raw material prices (2.) Labour shortages.

Source: Mercury Securities Research - 13 Jun 2022