Case Study of Pentamaster Corporation Berhad (7160)

Overview

Pentamaster Corporation Berhad is an investment holdings and provision of the management services company founded in the Year 1991 in Penang, which primarily involved as an automation manufacturing and technology solution provider. PENTA provides a flexible and high quality of services, cost-effective solutions, delivery system and automation system to satisfy their customers.

PENTA listed in the Main Market of Bursa Malaysia on 11th October 2004. With more than 25 years of experiences and proficient skills, they served customers from various part of globe such as United States, Europe, Africa, Asia Pacific & ASEAN countries.

 

Business Model

PENTA engaged in the integrated and customised solutions ranging from semiconductors, computer, automotive, electric & electronics, pharmaceutical, medical devices, food & consumer goods to general manufacturing. For examples, i-ARMS incorporates intelligent conveyor system such as RFID (radio frequency identification), MEMS (manufacturing execution system) solution, robotic system, high-speed sorters and vision system. The core competencies of PENTA include mechanical engineering design, software programming technology, control engineering & technology, imaging vision technology, electronics & instrumentation design.

Financial Review


Based on the past 5 financial years of revenue chart above, PENTA’s revenue grew y-o-y from FY2014 (+20.35%), FY2015 (+3.15%), FY2016 (+81.74%), FY2017 (+87.04%) and FY2018 (+48.56%). On a CAGR basis, revenue has grown 44.36%. The growth in revenue is driven by the improvement of contributions from both automated equipment (AE) and automated manufacturing solution (AMS) business segments, which constituted approximately 80.0% and 18.8% of the total Group’s external revenue respectively. Automated equipment (AE) remains the Group’s major revenue due to strong demand for smart sensor test equipment and solutions from the telecommunication segment. For examples, the increasing prevalence of smart sensors adopted in the latest smartphone upgrade, as well as smartphone peripherals include wearable items such as wireless headphone products and watch. While for automated manufacturing solutions (AMS), the increases of group’s revenue was mainly due to the higher demand for integrated manufacturing solutions from customers in both telecommunication and automotive segment.

The gross profit of PENTA grew with a high record by approximately 70.97% from RM80.6 million in FY2017 to RM137.8 million in FY2018. Especially in the Year 2018, the gross profit of PENTA increased was due to the continuation of strong sale orders achievement throughout FY2018 with four consecutive quarter-on-quarter growth especially from its flagship test solutions in ambient and proximity sensors, 3D sensors test equipment and solutions.

The Profit After Tax (PAT) was grown from RM6 million in FY2014 to RM94 million equivalents to 139.80% in FY2018. On a CAGR basis, the Profit After Tax (PAT) grew by 101.19% was in line with the growth of revenue and gross profit.

Cash Flow Statement

The net cash from operating activities has increased in FY2018 amounted to RM74.9 million from RM34.1 million in FY2017. The increased cash flow from operating activities indicates that the company is healthy and have more money for necessary options such as business expansion, share buyback, pay dividends, reduce debts and save on interest.

The net cash from investing activities has a negative figure in FY2018 (- RM18.6 million) was mainly due to the purchase of intangible assets, investment property, plant and equipment. When the company has reported negative cash flow from investing, indicate that the firm is in the growth mode, and believe it can generate a positive return on additional investment.

The net cash from financing activities has increased from RM3.8 million in FY2017 to RM179.6 million in FY2018 due to the proceeds from the disposal of shares and proceeds of the issuance of shares to non-controlling interests of a subsidiary. An increase in this number indicates that the cash has come into the company and will help to boost assets levels and to fund its operation.

Based on my computation of liquidity ratio, PENTA has a current ratio of 3.2778 times in FY2018 compared to 2.0185 times in FY2017, indicate that the company do not face any liquidity issues, and capable of paying back its liabilities by using current assets such as inventories, trade receivables, derivative financial assets, other receivables, deposits, prepayments, cash and cash equivalents.

Future Prospect & Challenges

Pentamaster has achieved an outstanding order book amounted to RM239 million, based on the purchased orders secured from customers at the end of June 2019. There are 90% made up by the automated test equipment (ATE), and the remaining of 10% was made up by the factory automation solution (FAS). (Source: TheEdge 19 Aug 2019)

Based on the Annual Report FY2018, the new proprietary products for wafer testing developed by PENTA are VCSEL (Vertical Cavity Surface Emitting Laser) / LiDAR (Light Detection and Ranging) probing test machine known as TROOPER and burn-in test machine known as ZETA. With these technologies’ advancements, the groups expect better earnings delivery in 2nd half of 2019 driven by VCSEL wafer level testing and burn-in machine, higher utilisation of Batu Kawan Plant and positive momentum in 3D-sensing adoption such as Structured Light (SL) and Time of Flight (TOF) applications among Android-based smartphones players. (Source: TheEdge 19 Aug 2019)

PENTA also is making progress in catering the medical segment with several projects involving its i-ARMS (intelligent automated robotic manufacturing system) being developed for precision manufacturing automation in the medical field for its clients. During FY2018, PENTA has completed the new production plant in Batu Kawan, Penang, which has helped to increase the production floor space by approximately 90,000 sq.ft. This new plant was custom-built and equipped with a clean room with an ISO Class 9 environment categorisation, to cater for the Group’s AMS segment which targets potential customers in the medical field. (Source: Annual Report FY2018)

My Insight

Based on my calculation, Pentamaster Corporation Berhad has a fair value of RM6.945. The current market share price of PENTA is RM3.85 which is undervalued based on the intrinsic valuation. (Based on 12 September 2019). PENTA has a beta of 1.757 (500days) indicates that the company is more volatile than the market. Based on my computation of Compound Annual Growth Rate (CAGR), PENTA has an expected market return of 6.19%. PENTA has a very strong fundamental and it can achieve an ROE with double-digit even though the Return on Equity (ROE) has decreased from 24.981 times in FY2016 to 16.033 times in FY2018, it still can be considered as a good company.

In conclusion, PENTA has achieved a fantastic performance in FY2018 compared to the other financial years due to the increase tremendously higher for revenue, gross profit and profit after tax. By looking at the growth of automated test equipment (ATE) and automated manufacturing solution (AMS), the prospects of the company remain bright, as it considers as the Internet of Things (IoT) and Industry 4.0 will need a lot of high-end equipment to test and automate. I believe the company can grow very well in the future.

Disclaimers

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Written by Stella Goh | 17 September 2019.

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