Valuation / Recommendation

Results were within expectations, achieving 22.9% and 19.3% of our full year revenue and PATMI forecasts for FY22 respectively, driven by the Automated Testing Equipment (ATE) segment, contributing 67.3% to its revenue for 1Q23 (-2.7% yoy) whereas the Factory Automation Solutions (FAS) segment contributed 32.7% (+82.7% yoy).

We maintain a HOLD on Pentamaster with a revised TP of RM5.48 (up from RM5.35) based on FY23F EPS of 15.5sen and PE of 35.4x in line with the 5- years average. We like the stock due to its attractive expansion plans, strong order book, and solid track record. The target price represents a potential return of 14.2% over the current price.

Investment Highlights

The automotive segment contributed 54.5% to its total revenue for 1Q23, riding on the global automotive electrification where the automotive industry continues to dominate the ATE segment with its revenue contribution of approximately 79.1% for 1Q23 (1Q22: 45.2%), which represents a growth of 71.8% within the ATE segment.

The Group continued to benefit from the structural shift, influenced by the mass adoption of electric vehicles. We think that the automotive and medical segment will be a main driver to group revenue in FY23, offsetting lower contributions from electro-optical segment due to smaller sales volume on test equipment for sensors arising from lack of major upgrades in the smartphones industry.

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. The 1st phase of the construction is expected to be completed within 2H23, Approximately 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 FY24. 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 a record order book of approximately RM610m (up from RM600m previously), where 45% is from the FAS segment, and 55% is from the ATE segment. 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 FY22, and a 5-year revenue CAGR of 29.1% from FY16 to FY21, despite the COVID-19 pandemic in FY20.

Risk factor. (1.) Rising raw material prices (2.) Skilled-labour shortages.

Source: Mercury Securities Research - 12 May 2023