Investment Highlights
- We maintain our BUY call on Pentamaster Corp (Pentamaster) with an unchanged fair value of RM4.64/share, pegged to an FY23F PE of 27x, at parity to the group’s 3-year forward average. We make no adjustment to our neutral 3-star ESG rating (Exhibit 3).
- Our earnings forecast remains largely unchanged following Pentamaster’s 1HFY22 investors briefing last Friday. Here are the key takeaways:
- Pentamaster’s order book remained at RM500mil as at end-1HFY22, which translated to a book-to-bill ratio of 2x. 70% of the order book were secured by the automated test equipment (ATE) division while the remaining 30% were from factory automated solutions (FAS). By industry segmentation, 40% of the order book were contributed by the automotive segment.
- Electro-optical, which made up 27% of the group’s 1HFY22 revenue, contracted 41% YoY. This is due to the lack of major upgrades in the smartphone sensor development. We maintain our flattish growth assumption for FY22F–FY24F on the back of slowing smartphone market globally.
- The group’s administrative expenses have trended higher at 10% of revenue during 1HFY22, compared to 9% in 1HFY21. This is primarily due to imperfect forex hedging as fair value loss of RM12mil on forex forward contracts was partially offset by unrealised forex gain of RM7mil. Stripping out this, 1HFY22 core net profit of RM43mil registered a commendable 25% increase YoY.
- Against the backdrop of rising US-China-Taiwan geopolitical tensions, the group’s strategy is to set up regional offices for business risk mitigation. Following the acquisition of 30% of Everready Precision Industrial Corp (EPIC) for US$6.8mil last month, the group has expanded its electro-optical business in Taiwan, which accounted for 2.5% of the group’s 1HFY22 revenue.
- Pentamaster’s Campus 3 expansion, which is expected to add 600K sq ft of production space, will be delayed by 6 months until 2H2023 for Phase 1 and 1H2024 for Phase 2, amid the persistent shortage of construction workers and higher building material costs.
- Upon the completion of Campus 3, the group expects FAS to contribute a higher 40% of revenue from 30% in 1HFY22. We are positive on this development, which is driven by a massive shift in trends towards factory automation in a post-pandemic environment amid rising labour costs and inflationary pressures.
- We continue to like Pentamaster, particularly on its 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 - 15 Aug 2022
