• Maintain BUY and MYR5.95 TP, 49% upside with 0.5% FY24F yield. Pentamaster Corp’s 9M24 core net profit of MYR63.6m (+3.4% YoY) missed expectations due to prevailing weak demand in the automotive sector. Nevertheless, its factory automation solutions (FAS) segment presents growth opportunities, particularly in the medical device sector, as the industry progressively adopts FAS for operational efficiency, safety, and adherence to stringent regulatory standards.

• Below expectations. The 9M24 core net profit of MYR63.6m (+3.4% YoY) fell short, making up only 67% and 70% of our and Street's full-year estimates. The automotive segment saw another disappointing quarter, impacted by persistent market headwinds following the recent policies and tariffs announced by the US and Europe on Chinese-made EVs.

• Results review. 3Q24 revenue of MYR150.2m (-12.4% QoQ, -15.1% YoY) is mainly impacted by the lower automated test equipment (ATE) sales volume. The division’s topline declined to MYR69.8m (-36.1% QoQ, -70% YoY), mainly due to lower project values delivered in the automotive and electrooptical segments. However, the PBT margin improved sequentially to 9.7% (vs 2Q24: 6%) thanks to higher-margin projects. This offsets the weaker FAS margin, which dropped 5.1 ppts to 28.2% due to higher material costs.

• Outlook. Pentamaster anticipates that the performance of its ATE segment will remain muted – potentially through 1H25 – with ongoing macroeconomic uncertainties, particularly in the automotive sector as key markets impose policies and tariffs on Chinese-made EVs. Additionally, China’s EV market and supply chain have become increasingly competitive and disruptive, limiting its ability to fully capture growth opportunities in the region. Despite the bleak outlook for the automotive sector, Pentamasterhas identified several key growth opportunities to offset these challenges, particularly the rising demand for advanced packaging in semiconductor manufacturing and the ongoing evolution of optoelectronic devices. The group is also implementing key initiatives to streamline its operations and improve efficiencies.

• Keep BUY. For now, we make no changes to our earnings projections pending further granularity at its analyst briefing today. Our TP remains at MYR5.95 based on an unchanged 33x FY25F P/E (+0.5SD of its 5-year mean) and inclusive of a 2% premium (based on its 3.1 ESG score).

• Downside risks include slow replenishment of its orderbook and skilled labour shortages.

Source: RHB Securities Research - 8 Nov 2024