Saturday, 15 August 2020

My Old Good Friend "Pentamaster"

Penta has been in my watchlist for quite long time already. I traded Penta several times before this blog was started. This is the first post on Penta and I am not holding any of this stock at the time of writing. 

A Summary of today's Corporate Insight with Pentamaster


Mr Yong started with company overview, as we can see that Automated Test Equipment (ATE) was the major contributor to the group's revenue, consisting more than 85%. Factory automation solutions (FAS) contributed around 13-15% of the revenue. During 1H FY20, FAS sales had gone up and contribution in revenue had improved to 32.6%.
 

Penta has two main factories, one is located at Bayan Lepas and another is at Batu Kawan. Based on Ms Joo comment, currently Bayan Lepas plant is running at 100% full capacity and Batu Kawan is running about 60-80%. 

Looking at this slide, it shows the difficulty for Pentamaster to carry out projects for their clients during this pandemic. Mr Yong mentioned that no one has come prepared for this pandemic, the management plans to set up present outside of Malaysia to solve the restriction. 

Reason of going HK listing is to serve China market and Penta has benefited on the trade war. 
In short, Penta Malaysia stock price has been overpriced, Penta HK is still worth to look into. 
A newly set up subsidiary Pentamaster MediQ where the group has diversifying their businesses into medical segment which will show in other slides. 

Mr Yong has shown how Penta transform their business into customize equipment maker until integrating factory automation solutions to their customers.  




The latest 3D sensing module complete assembly line can help to assemble up to nano meter scale of sensors into smart phones. Meaning this equipment is very precise!!


Based on the management research, malaysia is one of the largest medical product exporter for catheter other than gloves. The acquisition of TP Concept Sdn Bhd can help to set up medical machines to produce single use pen needle and catheter. 
Currently Penta is making the prototype for medical equipment while waiting to get certified from US and Malaysia departments. Expected 2022 will sell into medical market. Penta will work with distributors to push into local market. 
From the management internal research reported that those medical equipment having around USD6.8bil market and with 6 to 11% growth rate.   


Mr Yong said Pandemic didn't slow down the chip manufacturing spending rather boost their sales on electronic products. 

Penta's major market is on Tier 1 and 2 phone manufacturers. Due to intellectual properties issue, many test equipment have to be customized based on customers' requirement. Although Penta do have competitors but many are standard test equipment manufacturers such as Vitrox and Mi.

Automotive become another crucial sector for Penta to venture into. As mentioned in Q2 FY20 report, Penta covers IGBT, AC/DC power inverter, battery bank, capacitor and car dashboard assembly and test handling equipment which mainly supply to electric vehicle industry. 

After that Ms Joo presented on the financial performance. She highlighted that the management had transformed its business during 2016 to focus on customize test equipment and the transformation had done well. Further to that, the management would like to diversify their business to have a more evenly revenue contribution. 
Talking about 1HFY20 performance, it was within the group expectation as the disruption on supply chain. Ms Joo mentioned that the revenue cannot be recognized if the project yet to sign off by customers. Usually customers place order, a 6-8 weeks lead time for ATE project to be delivered and installed. Deposits will be placed together with the purchase order, those deposits will record under contract liabilities in balance sheet. Projects that have not been delivered, installed or commissioned will record under inventories.
Automotive segment is having higher profit margin compared to telecommunication due to the complexity of the testing procedure. While medical device is having higher profit margin than automotive mainly because medical device require higher precision. 
Regarding to dividend payout ratio, so far no written policy. The chairman deems to maximize the return for the existing fund the fund is best to invest into other segments. 
Ms Joo presumed a more balance revenue contribution from all segments in next 3 years. Pioneer status will be expired after 2026, 6 more years to go.         

Not much contribution will see from low cost ventilator, at the moment it is still a prototype and waiting for approval. 

Let's see how is Penta Q2 FY20 financial performance.

The group recorded a decrease of 14.7% in revenue for current quarter compared to the corresponding quarter last year. This was mainly due to the unprecedented Covid-19 pandemic that impacting the group's operation as supply chain had been disrupted and global lock down on cross boarder travelling. 
ATE segment recorded a decrease in revenue by RM35.6 million or 33.5% to RM70.7 million in the current quarter as compared to the previous corresponding quarter last year. The drop in revenue under the ATE segment for the financial period ended 30 June 2020 was the result of the deferment of a timely revenue recognition caused by the disruption in project shipment and site installation where logistic and travelling restrictions impacted business activities of this segment. The MCO imposed by the Government of Malaysia from 18 March 2020 to 12 May 2020 as part of its effort to contain the Covid-19 pandemic has also impacted the Group’s production capacity in the second quarter where limited workforce were allowed to operate at the Group’s production premises at any one time. As the Group’s test equipment and solutions are exposed to a wider end market application and a more diverse industry base, the global technology advancement and momentum across various industries will continue to provide a growth platform for the Group’s ATE segment in the immediate term.

FAS segment recorded revenue of RM32.9 million in the current quarter as compared to revenue of RM21.5 million in the corresponding quarter last year, representing increase of approximately 53.0%. The increase in revenue from the FAS segment during the financial period ended 30 June 2020 as compared to the financial period ended 30 June 2019 was mainly due to contribution from the newly acquired subsidiary, TP Concept Sdn. Bhd. and the sustainable demand on the Group’s proprietary i-ARMS (intelligent Automated Robotic Manufacturing System) solutions from its consumer and industrial products segment as the adoption of industry 4.0 and artificial intelligence gained traction as part of the manufacturing sectors digital transformation.

Looking at the balance sheet, inventories had not much changes in values. It could be assumed that production capacity was being controlled just to deliver projects that able to commission at site. Contract liabilities on the other hand reduced by 51.8% from RM39.385 mil Q1 to RM 18.946 mil in Q2. It was aligned with the report where higher revenue recorded in the current quarter under review compared with the preceding quarter mainly due to increase in sales from the ATE operating segment, some projects had fully commissioned under this quarter and hence, contract liabilities reduced. 

Comment: 
1. Q2 performance has no surprise and it was within my expectation as I anticipated that the impact of MCO to Q1 FY20 ATE performance might still persist in current quarter.   
2. Good news is the group has resumed cross border travelling for its project site installation, albeit on a more restricted basis. More sales had closed up in Q2 as mentioned earlier. I believe that Q3 FY20 will see recovery on revenue and profit from ATE segment. 
3. Contract liabilities running low, are sales picking up? Although the group has mentioned travelling has been allowed, paying new visits to potential customers for design discussion might remain uncertainty. 
4.  The management is promoting its new subsidiary "MediQ" to venture into supplying medical devices. The products can only be sold to market after certified by US and Malaysia department. It will only contribute to the group in 2022. 
5. I will remain my target price at RM3.57 with the continuous increase in percentage contribution from FAS and recovery in revenue from ATE by considering PE = 30 and FY20 EPS = 11.94sen (after bonus issue). 

Technical Analysis:
The strong bullish trend has ended after the stock price broken down the support line (Blue). Currently, price is moving in a side way trend, hovering around Fibo 0.618 as its next support line, once the price moves lower than that, another wave of sell down to this counter. MACD made a negative cross recently, which is a sell signal. 
I will wait to bottom-fish on this stock again when the price has gone lower enough. Penta is fundamentally strong and currently it is with net cash position.   

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