The research house, which downgraded Pentamaster to "underweight" cut its FY20 and FY21 forecasts on the group by 2% to 10% after the weaker-than-expected earnings announcement while also factoring in growth prospects from its diversification into the medical sector.
"Although we continue to like Pentamaster due to its positive prospects, we deem that the stock is overvalued given the recent run-up in its share price.
"Pentamaster’s positive prospects are driven by growth in the ATE segment due to higher demand of smart sensors in devices FAS growth supported by the adoption of Industry 4.0 and margin expansion from portfolio diversification efforts across all market segments," said AmInvestment.
The research house cut its fair vaue on the stock to RM3.21 from RM3.30 previously, which represents a 21.7% discount to its last trade price of RM4.10 on Friday.
Pentamaster's 2QFY20 results were below expectations at RM17mil, which brought 1HFY20 core profit to RM33mil, which accounted for 36% and 39% of AmInvestment's and consensus full-year estimates respectively.
1HFY20 core profit was 23% lower year-on-year due to a 15% drop in revenue on the back of lower automated test equipment sales impacted by Covid-19, which was partially offset by higher demand for factory automated solutions.
"By customer segment, sales declines in the telecommunications and automotive sectors were partially offset by growth in the medical and semiconductor sector," said AmInvestment.
On Pentamaster's diversification plans, AmInvestment cited Starbiz's report that the group is in the process of obtaining approvals from the US Food & Drug Administration and Malaysia's Medical Device Authority.
The group will utilise its Batu Kawan plant to produce dual-safety pen needles for diabetic patients to admnister insulin shots and safety IV catheters to administer drugs or fluids and to draw blood.
Production is set to commence in 1HFy21 and the medical segment is expected to contribute about 10% of revenue in FY21, growing to about 30% contribution in 2023.
The group has earmarked about RM60mil for the production of these devices in the next three years.
"We have factored in growth relating to the medical sector in our earnings forecasts, but await further details on plans for Pentamaster MediQ in an upcoming analyst briefing," said the research house.
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