• Initiate coverage with BUY and a TP of MYR6.16, 25% upside with 0.4% FY24F yield. Our TP is pegged to 33x FY25F P/E (at +0.5SD from the 5-year mean) and includes a 2% premium, based on its ESG score of 3.1. We are optimistic about Pentamaster Corp's near-term earnings potential, driven by heightened demand in the factory automation solutions (FAS) segment and the recovery in the semiconductor space in the early upcycle, which should boost its automated test equipment (ATE) unit.

• Automotive market revving back to life. The automotive chip market is set to undergo exponential growth with power semiconductor devices like silicon carbide (SiC), gallium nitride (GaN) and insulated gate bipolar transistors (IGBT) being in high demand – given the advent of EVs. SEMI expects to see a 0.7% QoQ increase in capex spending in 2Q24 following declines of 17% YoY in 4Q23 and 11% in 1Q24. Several major semiconductor players are expected to continue investing in SiC manufacturing and fabrication facilities, due to the proliferation of such semiconductor material. Pentamaster’s automated test and burn-in solutions for SiC- and GaN-related power modules should enable it to capitalise on this trend.

• Further opportunity for FAS. This segment is set to see structural demand growth, driven by the rising need for automation across various industries and the ongoing advancements of Industry 4.0. As businesses strive to enhance efficiency, reduce operational costs, and improve precision, the demand for automated solutions continues to rise. Currently, the medical industry is the main contributor to this division’s growth – which Pentamaster intends to leverage on.

• Semiconductor upcycle. The semiconductor sector is poised for a robust recovery in 2H24 and into FY25, with the capex cycle showing signs of revitalisation. As per the latest World Semiconductor Trade Statistics (WSTS) forecast, the value of the global semiconductor market is projected to grow by 16% YoY in 2024 to USD611bn. This resurgence will be driven by increasing demand for advanced technologies such as 5G, artificial intelligence (AI) and EVs – as these require sophisticated semiconductor components. Additionally, it stands to benefit from US-China trade tensions, by becoming a strategic alternative supplier amid export restrictions, thereby enhancing its role in the industry's resurgence. Moreover, the National Semiconductor Strategy (NSS) will drive the long-term growth of Malaysia's semiconductor industry, benefiting companies like Pentamaster through enhanced investment and innovation.

• We forecast a 3-year (FY24-26F) earnings CAGR of 18.2%, mainly driven by the growth of the medical devices unit, coupled with the recovery of the automotive and semiconductor segments. The group has a healthy balance sheet and net cash of MYR490m (ie MYR0.69 per share) as of FY23. We ascribe 33x FY25F P/E (+0.5SD of its 5-year mean) and apply a 2% premium (based on its 3.1 ESG score) to its intrinsic value to derive our TP. Key downside risks include a slow replenishment of its orderbook and skilled labour shortages.

Source: RHB Research - 27 Jun 2024