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Pentamaster doubles down on auto, medtech segments despite global chip downturn

Pentamaster doubles down on auto, medtech segments despite global chip downturn

20 Nov 2023

AT a time when most local semi­conductor firms are seeing a slowdown in sales — especially in the consumer segment — amid a down cycle in the global chip industry, Penang-based automation house and equipment vendor Pentamaster Corp Bhd is not resting on its laurels. It has already made plans to invest in the automotive and medical technology (medtech) sectors.

This is in line with a major global trend towards e-mobility, the company’s co-founder and executive chairman Chuah Choon Bin tells The Edge in an interview. “As a technology company, we must always stay ahead of the curve and be at the forefront of major technology structural trends. This also gives us an edge over our competition by being a ‘custom’ solutions provider, identifying the next technology trends and focusing on them.”

With the growing importance of net zero greenhouse gas (GHG) emissions globally, he expects the momentum will continue to be robust in the next three to five years as more governments and countries focus on initiatives to cut GHG emissions, starting with the automotive sector.

After setting up international units in the US, China, Japan and Singapore, Pentamaster opened its fifth unit in Germany in March. “With the establishment of our new office in Germany, we are eager to enhance our presence and diversify into the electric vehicle (EV) and medtech sectors,” says Chuah.

The German office will play a pivotal role in research and development (R&D) activities while providing technical sales support to better serve the group’s customers, he says. “Given that Europe, particularly Germany, is a key hub of the auto industry, with more than five multinational corporations (MNCs) already our customers for power module semiconductors, this expansion is strategically positioned.”

A report by Indian market research firm Mordor Intelligence shows that the auto semiconductor market is projected to achieve a five-year compound annual growth rate (CAGR) of 14.4%, reaching a value of US$140 billion (RM662 billion) by 2028. This upward trend is primarily driven by the implementation of supportive government policies and the growing acceptance of electric and hybrid vehicles in the US and China.

In addition to the EV sector, Pentamaster is also expanding into the medtech space, with a particular emphasis on the UK, Poland and Ireland markets.

“Additionally, we will leverage our presence in Germany to serve as a gateway to the North African market. Our current revenue from Europe accounts for less than 10%, indicating a significant growth potential in this region for Pentamaster,” says Chuah.

Pentamaster offers automated test equipment (ATE) for the semiconductor industry and factory automation solutions (FAS) tailored for the medtech industry. The ATE division accounts for half of the group’s revenue, while the FAS division contributes about 45%.

In the realm of ATE, Chuah says Penta­master has achieved “remarkable success” in power modules and wafer-level testing, as well as burn-in solutions. These areas are projected to be high-growth sectors for the next five years.

“On the other hand, in the medtech segment under our FAS division, the growing market demand for precision automation in the manufacturing of high-end, technologically advanced medical products cannot be overlooked. This demand extends to precision assembly, Internet of Things integration and semiconductor technology,” he adds.

In 2024, Pentamaster plans to explore opportunities in Indonesia and the Middle East in the fields of medtech and agriculture. “Initially, we may allocate about 1% to 3% of the group’s revenue to kick-start these ventures, and our expansion will be contingent on the level of recognition and acceptance we achieve in these regions,” he says.

Today, Chuah, 62, is the single largest shareholder of Pentamaster, with a direct stake of 19.76%. The company’s top 30 shareholders include the Employees Provident Fund, Kumpulan Wang Persaraan (Diperbadankan), AIA Bhd, Kenanga Shariah Growth Opportunities Fund, two Hong Leong funds and two Public Islamic funds.

Bucking the trend

Pentamaster, ViTrox Corp Bhd, Greatech Technology Bhd and Mi Technovation Bhd are known as the Big Four ATE manufacturers listed on Bursa Malaysia.

While most of its peers and competitors have grappled with weaker financial results in the last two years, Pentamaster has maintained the upward trajectory in its earnings growth, thanks to its better product mix.

Last Thursday, Pentamaster announced that its net profit had increased 15% to RM68.43 million in the nine months ended Sept 30 (9MFY2023), up from RM59.68 million a year earlier, as the group saw improvements across its business segments.

For comparison, ViTrox saw its 9MFY2023 earnings decline 32% to RM103.9 million, while Mi Technovation’s 1HFY2023 profit decreased 7.5% to RM29.1 million.

Meanwhile, Inari Amertron Bhd — the country’s largest outsourced semiconductor assembly and test player, which has a heavy exposure to the consumer electronics segment — saw its bottom line drop 17% to RM323.5 million in its financial year ended June 30.

Notably, Pentamaster has a diversified customer base. In 9MFY2023, some 52% of the group’s revenue of RM522.93 million came from the auto segment, 18.8% from the medical device segment, 13.8% from the semiconductor segment, 9.8% from the electro-optical segment and the remaining 5.6% from the consumer and industrial product segment.

The share price of Pentamaster had gained 30% over the past 12 months to close at RM4.89 last Thursday, giving the company a market capitalisation of RM3.478 billion. The counter is currently trading at a historical price-earnings ratio (PER) of 38 times.

Chuah says he would leave Pentamaster’s share price performance and stock valuation in the hands of the market, which “sometimes can be quite irrational”, he acknowledges.

“[We have seen] PERs of 100 times for some companies and less than 10 times for some conglomerates. What we can do is deliver quality and sustainable returns to our shareholders, and we let the market decide how much we are worth,” he comments.

In a Nov 3 report, UOB Kay Hian Securities head of retail research Desmond Chong had a “buy” call on Pentamaster, but with a lower target price of RM5.80, from RM6.20 previously.

While Pentamaster’s results missed his and consensus full-year estimates due to timing differences in revenue recognition, he believes there is still value in the group’s improving operational matrix alongside traction from new customers which will continue to “anchor strong growth in 2024”.

Chong points out that against the tide of industry cyclical weakness, Pentamaster is riding on secular growth from the automotive and medical device segments — collectively contributing about two-thirds of total revenue — which is offsetting the moderate demand from the electro-optical and consumer and industrial product segments.

“The solid performance of the automotive segment is in line with the secular automobile electrification trends, where the group continues to make progressive breakthroughs with its comprehensive range of product solutions and innovations,” he says.

Targeting to hit RM1 bil revenue by 2025

Pentamaster is currently running at full capacity at its Bayan Lepas (Plant 1) and Batu Kawan (Plant 2) plants in Penang. The built-up area of Plant 1 is about 150,000 sq ft, while that of Plant 2 is 97,000 sq ft.

Chuah says the two plants have been supporting Pentamaster’s operations over the past few years, with a sales CAGR of 27%. “With last year’s revenue hitting a record high of RM600 million, we expect our sales to continue growing year on year and a bigger manufacturing plant is necessary to accommodate such expansion.”

With that, Pentamaster’s Campus 3 in Batu Kawan, with a built-up of 720,000 sq ft, is currently under construction. Some 600,000 sq ft is dedicated to production and the remaining 120,000 sq ft is allocated to R&D, administration and warehousing.

Chuah says that over the past two years, Pentamaster has experienced consistent annual revenue growth of 15% to 20%, while the CAGR of its top and bottom lines has been more than 20% over the past five years.

“Our commitment to expansion remains unwavering as we aggressively venture into high-value sectors like medtech and ATE for power electronics testing used in EVs. Our aim is to achieve a revenue milestone of RM1 billion by 2025, and if not by then, certainly by 2026,” he adds.

Chuah says the primary growth catalysts for Pentamaster in the next three to five years will be the group’s focus on power electronics semiconductor testing under the ATE division, as well as the development of medtech under the FAS division. He warns that in an increasingly competitive global landscape for the existing solutions, failure to move up the value chain could result in market disadvantage and potential profit margin erosion, or worse being made obsolete.

“Again, every industry has its ups and downs, or what we call ‘blips’. But if it proliferates on a longer trendline, you will note that the growth and structural change in the technology sector has been amazing,” says Chuah.

“Look at where we are now — artificial intelligence, driverless cars, robo-taxis, cryptocurrency and space travel. Technology has become so ingrained in our lives and we will likely see a deeper convergence going forward.” 

Source: The Edge Malaysia