Regional Morning Notes: Detailed Company Analysis

Broker: UOB Kay Hian

Date: Friday, 08 November 2024

Pentamaster Corporation Bhd (PENT MK)

Investment Rating

Recommendation: HOLD (Maintained)

Share Price: RM4.00

Target Price: RM4.40 (10% Upside)

Company Overview

Pentamaster Corporation designs, manufactures, and installs automated equipment for various industries, including semiconductor, pharmaceutical, medical devices, automotive, food and beverages, and consumer goods on a global scale.

Stock Data

GICS Sector: Industrials

Bloomberg Ticker: PENT MK

Shares Issued: 711.3 million

Market Cap: RM2,845.2 million (US\$711.3 million)

3-month Avg Daily Turnover: US\$2.0 million

52-week High/Low: RM5.32/RM3.37

Major Shareholders

Chuah Choon Bin: 19.7%

Abrdn Plc: 19.7%

Employees Provident Fund: 8.0%

3Q24 Financial Results

Pentamaster’s 3Q24 results came in below expectations. Despite a slight improvement in the orderbook to RM420 million, substantial improvement is anticipated only in 2H25 due to a lack of strong visibility in the automobile segment. The group is exploring opportunities in AI, data centers, high-performance computing, and networking to counter sector-specific downturns. Consequently, the earnings forecasts for 2024/25 have been cut by 8%/9% respectively, while the HOLD rating is maintained with a target price of RM4.40.

3Q24 Key Financial Metrics

Analysis of Results

The 3Q24 core net profit of RM24.4 million was weaker than expected, reflecting a 6% QoQ increase but a 9% YoY decrease, bringing the 9M24 core net profit to RM64.4 million (-1% YoY). The deviation was primarily due to weaker-than-expected sales, mainly dragged down by the automobile segment. Adjusted for unrealized forex losses (RM14.6 million) and other one-off items, the core net profit indicates a challenging market environment.

Revenue by Segment (9M24)

Key Financials

The 9M24 revenue dropped by 6% YoY, with higher growth from factory automation solutions (FAS, +80% YoY) offset by slower sales in the automated test equipment segment (ATE, -45% YoY). Segment-wise, the medical segment saw particularly strong sales (+2.4x) due to strong uptake for its intelligent automated robotic manufacturing system (i-ARMS). However, the automobile segment, the largest contributor in 9M23, saw its sales halved. Meanwhile, core net profit dropped by a narrower 1%, cushioned by a better product mix from the medical segment.

Orderbook and Strategic Outlook

The orderbook improved slightly to RM420 million, with medical-related orders contributing the most. However, substantial improvement is expected only in 2H25 due to a lack of strong visibility in the automobile segment. The group is adopting a three-pronged strategy focusing on geographical, segmental, and product/solution diversification to capture wider total addressable markets. The ongoing supply chain reconfiguration from China presents substantial untapped market potential, particularly with the group’s presence in Germany for the automobile segment. The group is also exploring opportunities in AI, data centers, high-performance computing, and networking to drive demand for its test equipment.

Earnings Revision and Risks

Following model updates, the earnings forecasts for 2024-25 have been cut by 8%/9% respectively to account for weaker automotive sales.

Valuation and Recommendation

The HOLD rating is maintained with a lower target price of RM4.40 based on 32.0x 2025F PE, which is -0.5x below the industry’s five-year forward PE. While 4Q24 may continue to see sluggish demand recovery in the automobile and semiconductor segments, value could emerge on firmer signs of recovery towards 2H25, supported by a favorable price point level.

Environmental, Social, and Governance (ESG) Updates

Environmental

To minimize waste, Pentamaster starts material procurement, assembly, and programming only after a suggested solution is approved by its customers.

Social

In 2020, Pentamaster supported NGOs with various donations, provided used computers to schools and charity homes to support e-learning, supplied low-cost ventilators to local hospitals, and offered financial assistance to the needy.

Governance

Pentamaster has an Anti-Bribery and Anti-Corruption Policy in place. There were zero whistle-blowing and bribery instances in 2020.

2024-2026 Financial Projections

Conclusion

Pentamaster Corporation faces a challenging market environment with weaker-than-expected sales in the automobile segment significantly impacting its financial performance. However, the company’s strategic focus on diversification and exploration of growth opportunities in high-potential sectors like AI and data centers presents a promising outlook. Investors are advised to HOLD their positions as the company navigates through these challenging times, with potential value emerging towards the second half of 2025.