20200320-软库中华金融服务-槟杰科达-01665.HK-Time_to_be_greedy__Why_not__7页_606kb

Pentamaster (01665.HK) Summary

Analyst Information

• Analyst: Brian NGO, CFA
• Contact:
  • Phone: +852 2533 3713
  • Email: brianngo@sbichinacapital.com
• Address: 4/F, Henley Building, No.5 Queen's Road Central, Hong Kong

Stock Overview

• Ticker: 01665.HK
• Recommendation: STRONG BUY
• Target Price (HKD): 1.55
• Current Price (HKD): 0.78
• Last 12 Months Price Range (HKD): 0.76 – 2.43
• Market Cap (HKD, bn): 1.2

Core Content and Main Points

1. Impact of the Pandemic

• Movement Control Order (MCO) in Malaysia:

  • The MCO was announced to slow the spread of Coronavirus (COVID-19), shutting most businesses, schools, and government offices.
  • Pentamaster is on the exemption list, allowing limited operations.
  • Only half of the workforce is allowed to work in the office/factory.
  • Some production lines were moved from Plant I to Plant II to comply with social distancing.
  • The MCO is expected to be short-lived, with minimal impact on daily operations and production.

• Coronavirus Impact on Revenue Recognition:

  • Revenue recognition is likely to be delayed due to production slowdown, project cycle extension, and travel restrictions.
  • This may lead to sluggish growth in 2020.
  • However, the order book remains strong, especially with rush orders, indicating recovery potential after the pandemic.

2. Financial Position

• Strong Cash Position:
  • As of the end of 2019, the Group held MYR 304.0mn (~HKD 535.0mn) in cash, which is ~42.9% of market capitalization.
  • The Group has a solid free cash flow to equity (FCFE), with positive net cash inflow from operations annually.
  • Management is cautious on capital expenditures (CAPEX) and mergers & acquisitions (M&A), contributing to strong cash reserves.

3. Investment Rationale

• Attractive Valuation:
  • The stock price has plummeted significantly, offering value after a disastrous decline from HKD 2.43 to HKD 0.76.
  • The Group is fairly valued or overly discounted, making it an attractive investment.
• Upgraded Rating:
  • The rating was upgraded from "Hold" to "Strong Buy".
  • The target price was revised to HKD 1.55, implying a significant upside.
  • The analyst believes the downside potential is limited, and the valuation is expected to recover.

4. Peer Comparison

• Market Cap (mn): 1,440.0 (Pentamaster) vs. peers ranging from 409.2 to 60,818.7.
• PE (X): 6.2 (Pentamaster) vs. peers ranging from 12.2 to 237.1.
• Fw PE (X): 5.0 (Pentamaster) vs. peers ranging from 12.1 to 68.3.
• PB (X): 1.9 (Pentamaster) vs. peers ranging from 2.4 to 9.2.
• PS (X): 1.7 (Pentamaster) vs. peers ranging from 1.8 to 20.0.
• Gross Margin: 37.0% (2020) vs. peers ranging from 32.7% to 58.4%.
• Operating Margin: 28.1% (2020) vs. peers ranging from 25.3% to 29.2%.
• Net Profit Margin: 26.5% (2020) vs. peers ranging from 24.0% to 31.5%.
• Return on Equity (ROE): 27.4% (2020) vs. peers ranging from 15.1% to 34.6%.
• Debt-to-Equity Ratio: 0.5% (2020) vs. peers ranging from 0.4% to 1.2%.
• Net Debt-to-Equity Ratio: -57.8% (2020) vs. peers ranging from -66.8% to -74.4%.

5. Revenue and Financial Highlights

• Revenue Growth (YoY):
  • 2018: 417.1 (A)
  • 2019: 487.1 (E) (+16.8%)
  • 2020: 518.7 (E) (+6.5%)
  • 2021: 614.7 (E) (+18.5%)
• Net Profit Growth (YoY):
  • 2018: 100.0 (A)
  • 2019: 131.4 (E) (+31.4%)
  • 2020: 137.2 (E) (+4.4%)
  • 2021: 172.2 (E) (+25.5%)
• Adjusted EBITDA Profit Margin:
  • 2018: 26.5%
  • 2019: 28.8%
  • 2020: 28.8%
  • 2021: 30.9%

6. Risk Factors

• Global Coronavirus Outbreak:
  • Could lead to production suspension in Pan-Asia.
• Second Outbreak in China:
  • After the resumption of work, a second wave could affect operations.
• Extended MCO in Malaysia:
  • Possible lengthening of the MCO could increase operational challenges.
• Slower Recovery from Pandemic and Trade War:
  • May delay the Group's recovery timeline.
• Slow Development in 3D Sensing and 5G:
  • Could affect growth prospects in the long term.

Conclusion

• Pentamaster (01665.HK) is undoubtedly affected by the global economic downturn and the pandemic, but its strong cash position, solid order book, and attractive valuation make it a compelling investment opportunity.
• The analyst has revised the forecast to a range of -5.6% to +1.5% and upgraded the rating to "Strong Buy", suggesting significant upside potential in the coming 12 months.
• Despite the short-term challenges, the Group is well-positioned to recover and outperform its peers.