Investment Highlights

• We maintain our BUY call on Pentamaster Corp (Pentamaster) with a higher fair value of RM4.64/share (previously RM4.03/share), pegged to a raised FY23F PE of 27x, at parity to the group’s 3-year average forward PE vs. an earlier 23x (0.5 standard deviation below 3-year average). We make no adjustment to our neutral 3-star ESG rating.

• We believe the group’s rapid transition to ride on the growing automotive segment should justify higher valuation multiples. Recall that the group’s order book surged 2.5x to an all-time high of RM500mil during 1QFY22, of which 40% was contributed by the automotive segment. We expect this segment to be the dominant growth driver moving forward.

• Pentamaster’s 1HFY22 core profit of RM43mil rose 21% YoY. The results largely came in within expectations, accounting for 48% of our full-year estimate and 47% of street’s. Hence we maintain our forecasts.

• The automated test equipment (ATE) division continued to be the largest contributor to the group’s top line at 73%. ATE’s 1HFY22 revenue surged 27% YoY to RM224mil on the back of substantively stronger contribution from the automotive segment, which escalated 4.0x YoY, and accounted for 45% of the division revenue.

• Meanwhile, 1HFY22’s semiconductor segment, which contributed 18% of group revenue, grew 26% YoY. However, the group noted that there were signs of inventory correction taking place.

• The factory automation solutions (FAS) division made up the remaining 27% of Pentamaster’s 1HFY22 revenue. While top line increased 6% YoY, PBT jumped by 70%, thanks to a better product mix. Consequently, PBT margin grew 5% points to 14%.

• QoQ, FAS revenue climbed 31% due to the timing of revenue recognition from projects. We remain upbeat on the FAS segment, driven by a massive shift in trends towards factory automation in a post-pandemic environment amid rising labour costs and inflationary pressures.

• The group’s key risks continue to be talent shortages, which could further worsen with the establishment of more multinational companies in Malaysia. We are also cautious on rising US-China-Taiwan tensions and will provide further updates on management’s views on its potential impact and its business risk mitigation plan in an investors briefing later today.

• We remain positive on the group’s prospects, as demonstrated by its commendable results and strategy to ride on the global momentum for automotive electrification. Pentamaster’s robust outlook continues to be supported by its:
  (i) Portfolio diversification efforts across market segments and expansion of customer base;
  (ii) Growth in FAS supported by the adoption of Industry 4.0; and
  (iii) Robust offerings in automotive segment, which is able to supply to both front-end and back-end customers.

Source: AmInvest Research - 12 Aug 2022