• Maintain BUY and MYR6.16 TP, 26% upside with 0.4% FY24F yield. Pentamaster’s 1H24 core net profit of MYR40.3m (+20.3% YoY) met expectations – given the anticipation of stronger quarters ahead from continued growth of its factory automation solutions (FAS) segment. We continue to favour Pentamaster due to its expanding presence in the medical devices industry, which offsets the slower-than-expected automotive recovery and mitigates the cyclical nature of the semiconductor market.

• Within expectations. At 40%/36% of our/Street's full-year estimates, we deem Pentamaster's 1H24 results to be in line, anticipating a better 2H. 1H24’s revenue of MYR342.2m remained flat due to a slow automotive recovery, but was cushioned by higher revenue from medical devices segment.

• Results review. The group’s 2Q24 revenue saw a slight YoY decrease, primarily due to weak momentum from the automated test equipment (ATE) segment. The division’s topline fell to MYR69.8m (-4.2% QoQ, -53% YoY), largely impacted by the general softness in the automotive end market. Its PBT margin dropped to 6% (1Q24: 16%, 2Q23: 28.7%) on lower sales volume, increased employee expenses, provisions for slow-moving inventories, and higher R&D expenditures. Despite this, the group’s core net profit rose to MYR23.2m (+36.1 QoQ, +92.2% YoY) due to margin improvement from the FAS segment from favourable changes in product mix and economies of scale.

• Outlook. Its orderbook is maintained at RM400m, with subdued demand from the ATE segment as the recovery of orders in the automotive sector takes longer than expected. Nonetheless, leveraging on its proprietary intelligent Automated Robotic Manufacturing System (i-ARMS) technology, the group has seen YoY revenue growth in the medical device industry due to the prevalence of automation solutions. Additionally, there is increasing momentum in integrating automation with renewable energy (RE), particularly in solar manufacturing. The group has been securing orders from this sector and is committed to supporting the expansion of automation in the solar energy market. Furthermore, Pentamaster has identified several growth drivers for its business, including the expansion of AI in cloud and data centres presenting significant opportunities for the demand of the group’s test equipment used in advanced semiconductor packaging.

• Keep BUY. We maintain our estimates, anticipating a stronger 2H with the FAS segment to continue its upward trajectory given the growing demand from the medical devices and RE industries. Our TP remains at MYR6.16 based on an unchanged 33x FY25F P/E (+0.5SD of its 5-year mean) and inclusive of a 2% premium (based on its 3.1 ESG score). Downside risks include slow replenishment of its orderbook and skilled labour shortages.

Source: RHB Research - 2 Aug 2024