On The Mend; Multi-pronged Approach To Spearhead Growth
While the systemic issues could continue to pressure margins, we expect stronger
revenue momentum to cushion the impact with higher absolute earnings growth.
Orderbook backlog stood at RM500m as of May 22, which is 2x higher yoy. With its
strategic sector exposure and robust demand for its highly-customised test equipment
and solutions, the group is expected to supersede its peak performance in 2019.
Maintain BUY. Target price: RM4.00.
WHAT’S NEW
• More details on 1Q22 results. Despite the systemic cost challenges that are pressuring
margins, Pentamaster Corporation’s (Pentamaster) core net profit surged by a
commendable quantum of 25% yoy, in tandem with its strong revenue growth of 27% yoy.
Management attributed this to a better product mix anchored by the automobile segment’s
higher margin on the back of strong demand for its burn-in, assembly and test for front-end
to back-end solutions. Going forward, management targets to achieve better gross profit
margin from the current level of 30% for the remaining 2022, which will premise on robust
sales from the automobile segment, in tandem with the increasing customers.
• Strong sales momentum cushioning margin compression; recorded highest
orderbook backlog. While supply chain disruptions and bottleneck could continue to linger
amid the structural change in the business operating environment, we understand that the
strong sales based on the visibility from its orderbook backlog are cushioning the downside
in terms of absolute earnings. Its latest orderbook backlog stood at RM500m (on a rolling
basis), which is 2x higher than the normal range last year. In terms of order mix, we
understand it is consist mainly of higher-margin automobile-related orders.
• Three-pronged approach to spearhead further growth. The group is spearheading
further growth via geographical, segmental and product/solution diversification after a speed
bump in 2020-21. For the automobile segment, besides China (Jiangsu), the group has
established a subsidiary in Japan, with Germany as the next destination. Meanwhile, for the
medical segment, the group is leveraging on TP Concept’s technical know-how for singleuse medical devices via MediQ, with earnings contribution expected in 2023. In terms of
product offerings, the group will continue to offer more automation solutions ranging from
components level to new generation semiconductor materials
STOCK IMPACT
• Progressively adjusting to new norm amid systemic disruptions. 2020-21 was a
washout period for the group due to worldwide travel restrictions alongside the movement
control order disruptions in Malaysia. We believe the worst could have been fully captured in
the past few quarters, with Pentamaster slowly seeing a smoother progress in its project
delivery and site installation. Meanwhile, the group is working on an upward pricing
adjustment to ease the impact from rising logistics and component costs. For its orderbook
backlog, it has been experiencing order intake momentum on the back of improving
sentiment for the equipment market. Its latest orderbook backlog is RM500m (on a rolling
basis) – the highest ever quantum, which is 2x higher than the normal range in 2021.
• Well-positioned to ride on the long-term structural growth from high-growth sectors.
The group is undergoing a high-growth phase with its structurally well-diversified revenue
exposure in the electro-optical and automobile segments. With the prevalence of
optoelectronics and 3D-sensing technology further compounded by the pandemic situation,
the group’s core products and solutions that cater for a wide range of smart sensors will
become increasingly important to its customers.
For the automobile business, while there is still an industry-wide disruption from the
microchip shortage situation, the structural growth is here to stay with the proliferation of
electric vehicles and autonomous driving. Given Pentamaster’s current exposure and
product portfolio encompassing a diverse area of the automobile test solution from front-end
to back-end, the group will be able to play a dominant role in this ecosystem. For the
medical segment, the group is making progress in the prototyping stage of single-use
medical devices like intravenous catheters and pen needles; the timeline for ISO13485
certification remains on track.
EARNINGS REVISION/RISK
• None.
VALUATION/RECOMMENDATION
• Maintain BUY with an unchanged target price of RM4.00 still based on 31.0x 2022F PE
(near industry’s five-year forward PE). Since our upgrade last week, Pentamaster’s share
price has surged 16%, reflective of its good value proposition after the gestation period.
Trading at 23.4x 2023F PE (-0.5SD below its 5-year mean PE), we believe there is still value
in the improving operational matrix alongside traction from new customers which could
surprise on the upside in 2023.
• Upside risks: a) faster-than-expected jobs delivery and project installation, b) better-than-expected margins on cost pass-through, and c) easing COVID-19 disruption.