Founded in 1991 (30 years anniversary) as a start-up focusing on software vision automation system for the semiconductor industry, Pentamaster Group (“Penta”), including Pentamaster Corporation Berhad (“Penta MY”) and Pentamaster International Limited (“Penta HK”) has over the years grew substantially to its latest market capitalization of close to RM3.5 billion.
Penta MY was listed on Bursa in 2003. In 2018, Penta MY spun off a part of the Group and listed Penta HK on the Hong Kong Stock Exchange (“HKex”). In 2019 and 2020, Penta was awarded the Edge Billion Ringgit Club, under the Highest Return to Shareholders category over Three Years for the technology sector.
This article introduces the Group’s background, business outlook, financial and SWOT analysis, and our assessment of the structural differences between Penta MY and Penta HK. Finally, answering the elephant in the room on whether should both entities be valued differently?
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Headquartered in Penang, Malaysia since the 1990s, Penta is today a technology company with >300 in-house engineers working round the clock to innovate, design, develop, manufacture, and install high value-added customized automated equipment and integrated factory automation solutions.
The Group’s focus is on customized equipment and solutions. They do not operate mass production of standardized equipment. The Group currently operates from 2 production plants with a total floor area of approx. 180,000 sq. ft. in Penang.
The Group’s products and/or solutions can be broadly categorized into 3 divisions, as follows:
Automated Test Equipment (“ATE”)
ATE can be simply explained as equipment to test the functionality and identify faults of fabricated devices and electrical components. The Group’s offerings for ATE include:
- Semiconductor electronic components testing solutions – To test components such as integrated circuits (“IC”) and smart sensors. For example, microelectromechanical systems (“MEMS”), smart sensor test handler solutions, automated vision inspection handler solutions, and intelligent sortation systems, etc.
- End product test solutions – To test consumer electronic products, telecommunications products, and Light Emitting Diode (“LED”). For example, LED burn-in test, LED tester, Open short leakage tester, etc.
ATE solutions cover a broad range of test subjects including light, temperature, sound, pressure, humidity, dimension, visual defects and electrical functional parameters, etc.
Within the ATE division, demand for optics and photonics sensing solutions makes up ~50% of the division’s revenue. This was mainly driven by the prevalent demand and upgrade of smartphones, gadgets, and their peripherals, especially so with the trend of remote working and studying.
In recent quarters, the Group received increased orders for customized test solutions in relation to ambient and proximity sensors. For illustration, ambient sensors are sensors widely used in smartphones to enable automatic brightness control of display backlight. Meanwhile, proximity sensors’ applications range from smartphones, part detection on industrial conveyor systems to collision detection on robots, etc.
The ATE division serves several industries like automotive, semiconductor, consumer and industrial, and medical devices. The chart below breakdowns the revenue contribution for the ATE division by industries in FY2020.
In FY2020, the contribution from the automotive industry recorded the strongest revenue growth, increasing by >50% as compared to 2019. This was due to strong demand from China for its test handling equipment for multilayer ceramic capacitors (“MLCC”), insulated-gate bipolar transistor (“IGBT”), silicon carbide (“SiC”), and gallium nitride (“GaN”)-based power management devices.
These components are particularly for high voltage and high current applications used in automobiles. The industry shift towards electric vehicles (“EVs”) is expected to sustain demand for these products for years to come.
The contribution from medical segment remains minimal as the Group just started its venture into the industry.
Factory Automation Solutions (“FAS”)
As its name suggests, FAS are customized and automated manufacturing processes/production lines built via integration of automated assembly and test modules, material handling, robotics technology, auto inspection as well as a manufacturing executive system.
Penta caters FAS to the manufacturing needs of various industries, with the breakdown (as of FY2020) as below.
In FY2020, the FAS division recorded the strongest revenue growth thus far of RM54.0m / 64.0% as compared to 2019. The surge in demand for the Group’s highly customized intelligent automated robotic manufacturing system (“i-ARMS”) was attributable to the growing adoption of Industry 4.0 automation and IoT-enabled processes.
I-ARMS is a comprehensive automated manufacturing system that integrates a combination of Penta’s automated manufacturing solutions (“AMS”) modules (such as material handling equipment and high-speed sorters) with other technology components such as vision devices, sensors, and RFID. I-ARMS can be programmed according to clients’ specific needs to perform intelligent pick-and-place, assembly, and test as well as sortation processes.
The Group’s i-ARMS solution includes automated assembly system for food tray (robotic arms assemble food and beverage into catering trays for airlines), automated conveying, boxing, weighing, sortation, storage, and palletizing system, and vacuum cleaner filter automated assembly.
Considering the shift towards automation, smart manufacturing, and the advancement into artificial intelligence, the Group is optimistic about the prospect of FAS in coming years, with the United States targeted as their key market.
Smart Control Solutions System (“SSS”)
Under the SSS division, the Group provides project management, smart building solutions and trading of materials.
SSS division has not been active, although it did generate a revenue of about RM9m for some factory maintenance jobs in FY2016. From thereon, the division’s revenue has been on a decline to date. In FY2020, SSS only generated RM192k in revenue. The Group has not commercialized the smart control business.
Note: This division (operated under Pentamaster Smart Solution Sdn Bhd) is currently under the structure of Penta MY only. Penta HK does not hold a stake in this division/company.
Having said that, the Group’s focus for years ahead would remain on its ATE and FAS divisions. In our view, SSS is more of a supplementary offering to its industrial-based clients i.e. merchandisers and warehouse operators.
Overall, the ATE segment remains and would remain as the largest contributor, making up 65% – 85% of the Group’s revenue. In FY2020, the FAS segment contributed 32% to the Group’s revenue, an increase from 13% in FY2019. We expect the contribution split between ATE and FAS to remain about the 70:30 ratio moving forward.
Penta’s key markets are China, Singapore, Taiwan, Malaysia, and Japan. Over the years, the Asia Pacific (“APAC”) region has been Penta’s largest market, contributing >90% of the Group’s total revenue.
Mr. Chuah Choon Bin (“Mr. Chuah”), aged 60 is the co-founder and current Executive Director cum Chairman of the Penta Group. He graduated with a Bachelor and Master Degree majoring in Electronics and Electrical from the University of Auckland. He has to date accumulated over 30 years of experience in the design and manufacturing of automation equipment and vision inspection system.
Ms. Gan Pei Joo (“Ms. Gan”), aged 45 is the Executive Director cum Chief Financial Officer of the Group. She started her career with PwC in 2000, before joining Penta Group in 2003. Ms Gan graduated with a bachelor’s degree of commerce majoring in accounting from Curtin University of Technology, Perth and was admitted as a member of ACCA in 2002. Mr. Chuah is the brother-in-law of Ms. Gan Pei Joo.
The directors report to a board of independent non-executive directors namely:
- Penta MY – Leng Kean Yong (non-independent), Lee Kean Cheong, and Loh Nam Hooi.
- Penta HK – Leng Kean Yong (non-independent), Mr. Sim Seng Loong @ Tai Seng, and Dr. Chuah Jin Chong.
Other key management staff includes:
- Mr. Hon Tuck Weng, aged 50 with >25 years experience in the automation solutions industry is currently the Group’s operation director. He has been with the Group since 1995.
- Mr. Teoh Siow Khiang, aged 64 is the senior general manager of Pentamaster Instrumentation (ATE and test and measurement system). He has been with the Group since 2006.
- Mr. Teh Eng Chuan, aged 47 heads the position as Chief Operating Officer for the ATE division. He joined the Group in 1996.
- Mr. Ng Chin Keng, aged 42 heads the position as Chief Operating Officer for the FAS division. He joined the Group in 2000.
- Mr. Ong Thean Lye, aged 61 heads the position as Chief Operating Officer for the Medical devices division. Mr. Ong joined Pentamaster MediQ since its inception in 2020. He was a director of Walta Engineering Sdn Bhd from 2012 to 2018 and TP Concept from 2018 to 2020.
- Mr. You Chin Teik, aged 44 oversees business development, research & development activities of the Group. He has been with the Group since 1998.
PAST YEARS FINANCIAL RESULTS
For the past 5 years, the Group’s revenue grew at a 4-year compounded annual growth rate (“CAGR”) of 22.5%, while net margin CAGR was similarly strong at 21.0%. The growth was mainly driven by strong demand for Penta’s ATE solutions.
In recent years, we also note the slight improvement in Penta’s gross/EBIT margin. Based on our understanding from the management, the increase was mainly contributed by the increased sales mix of FAS products and penetration into the automotive segment.
Over the years, the Group has also been enjoying a lower effective tax rate, averaging about 4%, as compared to the standard 24.0% corporate tax rate. It was disclosed by management that certain subsidiaries of the Group have been granted pioneer status by the Malaysian Industrial Development Authority (“MIDA”) which exempts 100% of statutory income in relation to certain products. The effective period of the relevant pioneer status is ten years from April 2016 subject to renewal before the fifth anniversary of its effective date.
Penta generates a healthy cash flow from operations (“CFO”) over the years, with its CFO & FCF to Net Income ratio averaging at about 1.07x and 0.76x respectively.
The lower FCF to Net income ratio in FY2016 and FY2020 were due to heavy capital investments. For example in FY2020, the Group invested RM39.5m in the business and was classified as capital expenditure (“CAPEX”) in progress. No further disclosures were made with regard to the nature of CAPEX.
Penta has a strong financial position with net cash of >RM400m and a current ratio of >5x as of FY2020. The operating cash cycle has declined in recent years to just 93 days in FY2020.
However, to note that there is a significant increase in the Group’s receivable cycle and drop in inventory level during FY2020. Upon clarification from the Management, we draw comfort on the following:
- Increase in receivables days – This was a result of the Group’s diversification into other industries i.e. automotive and medical, whereby the credit practice is unlike the electro-optical / semiconductor industry. For the latter, the Group has been enjoying sales with shorter credit terms, some even with upfront deposits; however, in the case of the automotive and medical industry, the Group is required to match its credit terms to the respective industry, of which credit terms are longer and without upfront deposits.
- Decrease in inventory days – This was due to a change in clients’ ordering patterns. Further, the industry-wide shortage of semiconductor components also contributed to the decline in inventory holdings.
Overall, we favor the Group for its strong technology and product portfolio, impressive growth & profitability, and strong balance sheet position. We expect the trend to continue favoring the Group as they ride on the semiconductors super cycle.
KEY TAKEAWAYS FROM PENTA’S AGM (11 JUNE 2021)
2) The Group incorporated a new subsidiary, Pentamaster MediQ Sdn Bhd in 2020 as part of its plan to venture into the manufacturing of single-use medical devices, equipment, and related instruments. As a start, the Group is focusing on two products namely Intravenous Caterers and Dual-Safety Pen Needles.
The Group has committed to invest RM60m over the next 3 years in this venture. Their target is to obtain ISO certification and the United States Food and Drug Administration (“FDA”) approval by the end-2022 for both products. Production to commence immediately after obtaining the FDA approval.
3) Given the trend of deglobalization/nationalization across regions, Penta is emphasizing the need to have operations in every key market via the setting up of an offshore support site (“OSS”). The idea of OSS is to bring Penta close to its clients with the expectation for a better relationship, collaboration and to provide quicker on-site customer support. Having a local presence also gives clients the confidence for knowing the Group’s commitment to the respective markets.
The Group currently has OSS in few major markets i.e. China, Singapore, Taiwan, United States, and Japan (recently). Moving forward, the management is looking to set up an OSS in Germany to penetrate the EV market and to set up a manufacturing site in Fujian, China in the medium term.
4) Ever since the outbreak of the pandemic, the management has been experiencing a change in clients’ ordering patterns. In the past, clients would usually make bulk orders and take delivery as and when equipment is complete.
However, since 2020, clients have turned conservative with their orders, where they now order on a low quantity/ piecemeal and just-in-time (“JIT”) basis. This has resulted in a longer production lead time as orders now come with shorter notice (harder to budget/estimate on resources).
5) The shortage of semiconductor parts i.e. pneumatics, motors, sensors, switch and etc is causing further delays to the overall production and delivery lead time.
6) The Group’s order book for the next quarter remains healthy at ~RM200m. They have not experienced any cancellation of orders; in fact, clients are demanding for quicker delivery of equipment.
7) In the short term, the Group expects to incur higher selling, general and administrative expenses as they expand hiring at OSS and incorporate new OSS in Japan and Germany.
8) For the next 5 years, the growth catalyst for the Group would remain to be its ATE and FAS products. Five key industries are opto-electronic, EV, medical, industrial factory, and warehouse automation.
Demand for warehouse automation solutions is expected to pick up as IR 4.0 accelerates. The recent e-commerce boom has made most logistic players realize the urgency and importance of having an automated warehouse.
9) The management is aware that the ATE market is getting saturated with competition, especially so for the standard ATE i.e. pick and place machine. Fortunately, for the segment in which Penta is operating in i.e. smart sensor testing, it remains less crowded given the higher expertise required in technical design and development.
However, in years to come, the management expects competition in the smart sensor testing segment to intensify, and to drive down product margin. In anticipation of the threat, the Group has since diversified its product portfolio to cater to the EV and medical segment.
Given the high barrier of entry and stringent requirements for both segments, the supply competition is expected to remain less in the medium term.
TO BE CONTINUED…