Why Pentamaster International Limited Is Worth A Closer Look

Pentamaster International Limited (PIL) (HKG:1665) is a Malaysian-based company and a spin-off of Pentamaster Corporation Berhad (PCB) (KLSE: PENTA). PIL provides automation technology and solutions to multinational manufacturers in the semiconductor, telecommunications, consumer electronics and automotive sectors spanning Asia Pacific, North America and Europe.

In this article, we will take a closer look at PIL’s business profile, management, and financials, to assess whether the company is suitable for investment. 

Business overview

PIL’s business can be categorised into two major segments: 

• Automated test equipment – Designing, development and manufacturing of standard and non-standard automated equipment.
• Factory automation solutions – Designing, development and installation of integrated factory automation solutions.  

	Automated Test Equipment (previously known as automated equipment)	Factory Automation Solutions (previously known as automated manufacturing solution)
Key features	Standardised and customised standalone automated equipment for (i) semiconductor electronic components testing for smart sensors and integrated circuits (ICs); and (ii) end products testing for consumer electronics, telecommunication products and LEDsAddressed customers’ functionality testing requirements during various stages of their manufacturing process	Customised integrated manufacturing system consisting of automated assembly and test modules, material handling equipment, robotics technology, auto inspection and MES (manufacturing executive system)Caters to specific manufacturing needs for automation
Main products and solutions	Microelectromechanical systems (MEMS) & smart sensor test handler solutions, automated vision inspection handler solutions, intelligent sortation system and end product testing solutions.	Automated manufacturing solutions (AMS) modules and i-ARMS solutions.
Key market trends	Internet of Things (IoT) revolution in end user industries such as telecommunications, automotive and medical devices have presented new applications for semiconductor ICs, especially those embedded with intelligence.  Semiconductor ATE is used to verify the device under test (DUT) (e.g. ICs or sensors functions according to design specifications or to identify and diagnose faults. Such functionality tests are usually an automated process because of the sheer volume of devices to be tested as well as the micro sizes of the test points on each DUT.	Factory automation is typically part of the modern assembly line production where components are integrated or processed with computerisation and automation of the whole manufacturing process. Industry 4.0 has been integrating smart automation solutions and real time data exchange into the manufacturing sector. Accordingly, all manufacturers are potential customers.

The group’s main revenue is from the automated equipment segment, accounting for 83.60% and 88.53% of total revenue in 2018 and 2019 respectively. 

	2019 RM’000	2018 RM’000
Automated test equipment	431,222	348,698
Factory automation solutions	84,311	86,402
Total revenue	487,088	417,098

(Source: 2019 annual report of PIL)

Geographically, Singapore and Taiwan are the PIL’s largest customer locations, accounting for 63.19% and 66.97% of total revenue in 2018 and 2019 respectively. 

	2019 RM’000	2018 RM’000
Singapore	257,512	243,782
Taiwan	68,670	19,780
China	39,123	44,709
Japan	31,026	17,398
Malaysia	26,421	26,995
Republic of Ireland	18,653	31,659
Philippines	18,205	2,065
United States	9,320	22,605
Germany	8,126	1,772
Others	10,032	6,333
Total	487,088	417,098

(Source: 2019 annual report of PIL)

Business strategies

PIL’s business model focuses on i) developing core technology, with approximately 70% of its staff technically oriented, ii) continuous innovation in customer-centric R&D, and iii) providing high value-added customized technological products and solutions for its customers. 

As the core of its business model is innovation and customised design, the group does not operate or maintain any mass production lines, and its production capacity depends on the availability of in-house engineers, the complexity and size of projects on hand, production space, and the types and size of products being produced. 

PIL intends to further strengthen its market position and expand its business by i) keeping abreast of the latest technological changes in the various industries it services, ii) increase its presence in key geographical markets, such as Greater China region and the US, iii) diversify into other high growth potential industries, such as automotive, healthcare equipment, medical devices and energy, to broaden its customer base, and iv) expanding and enhancing its production capacity and capability.

Currently, customers from the telecommunications and automotive industries are the largest revenue contributors at 84.0% and 83.7% of total revenue in 2018 and 2019 respectively. 

	2019	2018
	RM’000	%	RM’000	%
Telecommunications	337,394	69.3	304,421	73.0
Automotive	70,419	14.4	45,839	11.0
Consumer and industrial products	36,498	7.5	21,346	5.1
Semiconductor	34,494	7.1	41,228	9.9
Medical devices	8,283	1.7	1,421	0.3
Others	–	–	2,843	0.7
Total	487,088	100.0	417,098	100.0

(Source: 2019 annual report of PIL)

In 2019, PIL acquired TP Concept Sdn Bhd, a company engaged in the design and manufacturing of automation equipment for assembly and test of single-use medical devices. With the acquisition, the group targets to grow its medical segment contributed to more than 10% of total revenue in the coming years. 

Major shareholders and leaders

PIL’s largest shareholder is PCB with an equity stake of 63.71% as at 31 December 2019. The director of PCB chose to spin-off PIL as they believe the listing would i) increase the group’s exposure and raise its profile in key semiconductor markets such as the PRC and Taiwan, and ii) leverage on the enhanced prestige offered by an overseas listing status in an international financial centre to attract, cultivate and retain talents. 

(Source: 2019 annual report of PIL)

Mr. Chuah Choon Bin serves as Chairman of both PCB and PIL. He has a direct and indirect interest of 19.66% and 1.11% in PCB and PIL respectively. Mr. Chuah Choon Bin is a professional engineer and co-founder of the group. With his vast industry experience, he has grown the company from a simple automation house in 1995 to a high technology group now specializing in providing factory automation equipment and systems and information communication technology solutions to industrial and commercial customers. 

(Source: 2019 annual report of PCB)

Financials  

Measure 1: Growth in revenue and profits

PIL has achieved growth in revenue and profits at compounded annual growth rates (CAGR) of 50.89% and 61.32% from 2016 to 2019. These are indeed spectacular growth rates. 

Measure 2: Profitability

PIL has recorded commendable gross profit margins of 28.4% – 36.8% and net profit margins of 14.6% – 27.0% from 2016 to 2019. Meanwhile, the group’s return on equity ratios has ranged between 29.9% – 36.1% over the same period, which demonstrates that management is able to use and allocate shareholder funds efficiently.  

Measure 3: Liquidity

PIL current and cash ratios are at healthy levels. The group also does not have gearing issues as it is in a net cash position. As of 31 December 2019, PIL has cash and cash equivalents of RM304.0 million in comparison to total borrowings of RM3.4 million.

Round 4: Dividends payout

While PIL has declared dividends in 2018 and 2019, it is preferable that the group retains and reinvest the majority of its profits into the business to allow it to pursue available growth opportunities.

Conclusion

With a closing share price of HK$1.66 as at 5 June 2020, PIL is trading at a price to earnings (PE) ratio of 11.14, with a market capitalisation of HK$2.66 billion. 

PIL’s growth is underpinned by the pervasive use of Information and Communication Technology (ICT) products in peoples’ daily lives. From the internet and smartphones to blockchain technology and Artificial Intelligence, society at large seems ready and eager to embrace the latest innovations in the ICT realm. And investors with expertise and interest in this area could find PIL of interest.   

(Source: Google Finance)

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