Pentamaster 1H earnings fall on lower gross profit margin


PENTAMASTER Corp Bhd’s results for the first half of the year (1H21) missed CGS-CIMB Securities Sdn Bhd’s forecast by 41% as earnings were lower due to lower than expected gross profit (GP) margin after an unfavourable sales mix.

The CGS-CIMB Research analyst Mohd Shanaz Noor Azam said for 1H21, the Pentamaster’s revenue grew 21% year-on-year (YoY) on higher sales from its electro-optical products which rose by 54% on the back of the worldwide smartphone market recovery.

“This was partially offset by weaker automotive equipment sales following supply chain disruptions since the beginning of this year. Revenue from automotive applications fell 7% YoY in 1H21,” he noted in a recent report.

Despite the group’s stronger sales, Pentamaster’s earnings before interest and taxes margin in 1H21 slid 0.8% points YoY to 24.1% due to an unfavourable sales mix and higher operating and depreciation expenses.

“The group incurred higher raw material costs, transportation cost and outsourcing expenses related to equipment buyoff due to ongoing travel restrictions,” he said.

He projected a stronger 2H21 forecast for Pentamster driven by its electro-optical and automotive segments, but anticipates minimal margin expansion due to elevated operation expenditure.

Pentamaster’s revenue in the second quarter of 2021 (2Q21) grew 13% quarter-on-quarter (QoQ) to RM131 million due to higher demand for automated test equipment, where sales climbed 20% QoQ with higher project delivery from the electro-optical segment given the recovery in smartphone demand.

“Despite the stronger sales performance, Pentamaster’s GP margin fell 0.8% points from 29.8% in 1Q21 to 29% in 2Q21,” he added.

CGS-CIMB attributed the lower GP margin to higher outsourcing cost and an unfavourable sales mix given the higher sales contribution from the semiconductor segment, which has lower margins than the electro-optical and automotive segments.

“Overall, core net profit in 2Q21 fell 13.6% QoQ to RM18.2 million,” Mohd Shanaz stated.

Pentamaster’s outlook on its 2H21 sales delivery is optimistic, driven by resilient demand for its 3D magnetometer tester given new sensor upgrades in next generation smartphones and order backlog for insulated gate bi-polar transistor assembly and test equipment for e-mobility solutions.

“The group is addressing the equipment delivery issue by setting up assembly facilities in China and Japan, which are expected to start in 4Q21.

“This will help to facilitate automated test equipment delivery in 2H21,” the analyst stated.

He expects Pentamaster to incur above-average operational expenditure due to start-up costs for regional offices and higher raw material and transportation cost.

“Thus, we cut our financial year of 2021 (FY21)-FY23 earnings per share by 5% to 7% respectively. We downgrade the stock from an ‘Add’ to ‘Hold’ in view of recent outperformance in its share price with the stock up 19.5% over the past three months,” he said.

Pentamaster’s revised target price of RM5.60 is based on 37 times calendar year 2022 forecast of the price-to-earning ratio, and CGS-CIMB pegs its valuation to 0.5 standard deviation above the sector’s three-year historical average.

The multiple to 37 instead of 26 for the valuation is due to the rerating of the technology sector.