Does Pentamaster’s rally still have legs?
31 Mar 2017
The rally in Penta­master Corp Bhd’s shares doesn’t seem to be stopping – already, the counter has surged fourfold in the past 12 months.
Year to date, it has risen 78%. This is a feat considering it beat the FBM KLCI’s 7% gain by 11 times and is double the 39% increase chalked up by Bursa Malaysia’s Technology Index in the same period.
Equally, earnings of the Penang-based automated equipment company have grown from strength to strength – leapfrogging from RM3 mil in the first quarter ended March (Q1 2016), to RM9.5 mil in the final quarter of FY16.
On an annual basis, its FY16 earnings per share doubled to 18.5 sen.
‘Not overvalued yet’
Some may attribute the persistent rise in Pentamaster’s shares partially to its low base. Nonetheless, at a price of RM2.40 on March 28 – its highest in more than 10 years – its price-to-earnings multiple (PER) comes to 12 times.
“If you look at the technology sector, the average PER is around 14 to 18 times. Ours is less than 12 times. If we continue to grow, our share price (now) is still reasonable, it is not overvalued yet,” group executive chairman Chuah Choon Bin tells FocusM.
Chuah, who holds 21.5% in the company, however, appears to be indifferent to the rally in its shares, saying he has not been marketing his stock to analysts.
No research house covers Penta­­master.
In fact, Chuah credits it all to the group’s research and development (R&D) efforts four years back – venturing into high-end technology for smart devices – which has now started to bear fruit.
Chuah also affirms he is not retiring in the immediate future. This comes amid market talk that he could be stepping down.
“I am 56 this year, but no, I am not leaving anytime soon,” he says.
Chuah, an engineer by profession, co-founded Pentamaster, and has been instrumental in leading the group since 1991.
While acknowledging that the semiconductor industry is a cyclical one, Chuah is still positive on its prospects this year – and expects the sector to account for 80% of group revenue.
“We have orders in hand to keep us busy until the second half of the year. Performance-wise, we are (still) forecasting a double-digit growth in revenue and profit,” he says.
Having come off a strong FY16, however, this year’s growth rate will not be as good as last year’s, he adds.
“We managed to leapfrog in 2016 because we penetrated a new customer base – these are premium customers into higher-end products and more stringent requirements. They can give us longer-term forecast, better visibility and continuation in orders,” Chuah explains.
He adds that being good paymasters, this customer base helped, too.
The World Semiconductor Trade Statistics has raised its 2017 global semiconductor sales forecast growth from 3.3% to 6.5% to reach US$361 bil (RM1.6 tril), and up by 2.3% to hit US$369 bil next year.
To maintain margins
In the meantime, Chuah says the group should be able to maintain its margins at last year’s level, as its bottom line grows proportionately with the top line.
Pentamaster’s FY16 net margin came in at almost 18%, higher than 2015’s 14%. Gross margins meanwhile were at 32% versus 29%.
This comes as its net profit more than doubled to RM26.7 mil from RM12 mil. Revenue grew 81% to RM151.6 mil from RM83.6 mil.
In Q4FY16 alone, Pentamaster’s net profit surged over 500% year-on-year to RM9.5 mil, while revenue rose 125% to RM43.5 mil.
While there was a tax credit of RM3.1 mil, a large part of the growth was driven by higher demand for test equipment from the semiconductor market, especially the smart device sector – such as camera, microphone, position sensor MEMS and light sensor.
“We achieved higher revenue (also) because our average selling price increased,” Chuah shares, adding that a machine costing less than US$200,000 previously now sells for more than US$500,000.
The automated equipment segment is the group’s biggest revenue contributor, and also delivers the highest margin of 27%, compared to the 8-12% achieved by its automated manufacturing solution and smart control solution system segments.
“Pentamaster builds 5-in-1 test handlers, or essentially, a testing machine. 5-in-1 means there are five test parameters in one machine. This type of machines are more complex than most other machines,” an industry observer quips.
Basically, the group manufactures automated equipment and precision machinery components for the medical and consumer electronics sectors.
These engineering or manufacturing equipment have to be tested before being released to the public for safety regulations and quality controls.
Going forward, Chuah expects demand for testers to remain positive, as the number of new smart telecommunication and automotive products in the market increase.
“Today, many of the end-products have better functions and features – 3D, camera resolution, wireless, etc. The requirement for smart technology is higher now, there’s no longer any use for manual tracking,” he says.
Chuah expects growth for Pentamaster’s newly-ventured-into smart control solution system to pick up pace only next year, when the construction and property market recovers.
“The strong US dollar also benefits us, as we export 80% of our sales which are traded in USD.
However, we also buy in USD, so the exchange rate really just makes us more competitive, as we continue to move our product range higher across the value chain,” he says.
As much as the automation industry is booming, Chuah however highlights his concern that our education system does not train enough engineers in this field, and thus, not churning out talents.
Strong cash flow
Pheim Asset Management first emerged as a substantial shareholder in Pentamaster on Sept 22 last year with a 5.1% stake. It has since increased its stake to 6.3% as of Jan 20.
Asked on Pheim’s interest, Chuah says: “It still sees opportunity for Pentamaster to grow. According to Pheim, our PER is still very low.”
An analyst, while agreeing that PER should be considered when picking a stock, also points out the importance of a company’s cash flow.
For the 12 months ended Dec 31 last year, Pentamaster generated RM20 mil in cash from operations compared with RM8.6 mil the year before.
This could place the group in a still comfortable position, when it uses its RM30 mil net cash balance to expand capacity, as Chuah has stated he “would not want to take on debt if possible”.
“We are spending RM25 mil on capex to construct our new facility (which will double our capacity) in Batu Kawan, which includes the remaining 40% of the land cost. But we will spend it in phases. This year, we are looking at spending RM10 mil as construction begins," Chuah says.
The new facility has a manufacturing space of 90,000 sq ft on a 1.28ha industrial plot, and will house the group’s automated solutions segment.
It is worth noting that different technology companies operate in different segments of the industry and ecosystem.
Among the few technology players, Phillip Capital Management chief investment officer Ang Kok Heng likes ViTrox, given its better growth prospects.
While stocks in the technology sector have rallied in the past six months to a year, it is ultimately earnings delivery that will continue to drive investor interest and share price momentum.
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发表于 11-2-2017 07:45 PM
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