Pentamaster Corp Bhd
(Nov 8, RM4.71)
Maintain add with a higher target price (TP) of RM5.40: Core net profit fell 10.5% quarter-on-quarter (q-o-q) from RM24 million for the second quarter of financial year 2019 (2QFY19) to RM21.5 million for 3QFY19 mainly due to higher admin cost, which rose from RM11.6 million in 2QFY19 to RM15.5 million in 3QFY19. The group attributed the increase in admin cost to increases in staff’s incentives and remuneration expenses. We expect admin cost to fall back to the RM12 million level in 4QFY19. In addition, the group posted a tax income for 3QFY19 due to recovery in tax paid in the first half of 2019 (1H19).

Revenue in the cumulative nine months of FY19 (9MFY19) grew 17.5% year-on-year (y-o-y), driven by higher contributions from its Automated Test Equipment (ATE) and Factory Automation Solutions (FAS) segments, which grew by 21% and 3% respectively. Overall, Pentamaster Corp Bhd posted a RM65 million core net profit for 9MFY19 against RM38.3 million for 9MFY18. 9MFY19 core net profit has already exceeded the full FY18 core net profit of RM64.3 million.

The FAS segment registered a 106% y-o-y pre-tax profit growth to RM8.4 million for 9MFY19. Its pre-tax profit margin nearly doubled to 17% in 9MFY19 (versus 9% in 9MFY18). The group is experiencing robust demand for its i-ARMS solutions and AMS (Automated Manufacturing Solutions) modules across a wider spectrum of industries, especially in the consumer, industrial and automotive sectors. Its FAS order book also surged to RM78.6 million in September 2019 (versus RM24.9 million in June 2019).

The stronger order book growth was also driven by the completion of the acquisition of medical equipment provider TP Concept Sdn Bhd in September.

We raise our FY19-21 earnings per share (EPS) forecasts by 3-5% for better margin delivery from FAS and lower tax expense due to its pioneer status. Following our earnings upgrade, we raise our TP from RM5.15 to RM5.40. We peg our valuation at 19.6 times calendar year 2021 forecast price-earnings ratio (PER), which is a 10% premium over our target semiconductor equipment sector mean PER of 17.8 times. Earnings-accretive acquisitions, such as TP Concept, new customer wins in China and a weaker ringgit versus the US dollar are potential rerating catalysts. Meanwhile, delays in 3D-sensing adoption in smartphones and intense competition are key downside risks. — CGS-CIMB Research, Nov 7