This article first appeared in The Edge Malaysia Weekly on December 9, 2024 - December 15, 2024

PENANG-based automated test equipment company Pentamaster Corp Bhd (KL:PENTA), which has a market capitalisation of RM2.89 billion, is performing an interesting manoeuvre involving its 64%-owned subsidiary Pentamaster International Ltd (PIL), say market watchers.

Last Wednesday, PIL suspended the trading of its shares on the Hong Kong Stock Exchange pending further announcements. Rumours are rife that Pentamaster is mulling over taking PIL private. PIL’s last traded price of HK$0.80 gives the company a market valuation of HK$1.92 billion.

“The market has been talking about PIL possibly being taken private, which is deemed positive for Pentamaster as the holding company can lock in the remaining 36% earnings in the subsidiary,” a market observer tells The Edge.

A look at the two companies’ latest financial statements reveals that PIL is the main contributor to Pentamaster’s earnings.

For the first nine months ended Sept 30, 2024 (9MFY2024), PIL’s net profit stood at RM88.8 million, down 18% from a year earlier, on the back of a 5.8% decline in revenue to RM492.18 million.

Pentamaster posted a 25.4% year-on-year drop in net profit to RM51.05 million for 9MFY2024 on the back of a 5.8% decline in revenue to RM492.18 million.

In terms of valuation, the company fetches a far higher market value than PIL of almost four times.

CGS International analyst Shafiq Kadir says while PIL looks “comparatively cheaper” than its parent Pentamaster despite both having similar businesses, the difference in valuation could be due to the nature of the stock exchange appetite in the semiconductor sector.

“This has something to do with the exchanges they are trading on. Semiconductor companies on Bursa Malaysia tend to trade at a premium versus their regional peers,” he says.

Pentamaster’s share price ended at RM4.23 last Wednesday, up as much as 22.6% from the previous day’s close, following the suspension of trading of PIL shares. At last Friday’s market close, Pentamaster had pared some of its gains to end at RM4.06, valuing the counter at a 12-month trailing price-earnings ratio (PER) of 40.24 times and forward PER of 34.12 times.

At PIL’s last traded price of HK$0.80 before the trading suspension, its historical PER stood at 8.79 times.

The other shareholders of PIL are Fidelity International with a 5.06% stake, its employees (4.53%) and a public float of 25.04%. Pentamaster co-founder and executive chairman Chuah Choon Bin holds 1.11% equity interest in PIL. Chuah has a 19.7% stake in the holding company.

A back-of-the-envelope calculation shows that Pentamaster would have to fork out RM392.4 million for the remaining shares, equivalent to 36% equity interest, that it does not own.

“Thus, the group needs to figure out the means to raise money either through internal funds or borrowings. On the flip side, the group will recognise higher profit as minority interest will be reduced to almost zero, which is positive for Pentamaster,” Shafiq points out.

As at Sept 30, 2024, Pentamaster had RM466.73 million cash in its coffers and no borrowings.

When contacted, Chuah neither denied nor confirmed the possibility of PIL being taken private. “We do have some news in the offing, but I need the regulators to first approve what we can say publicly about it,” he tells The Edge.

In a recent filing with Bursa, Pentamaster says there is no material development in the group in regard to PIL’s trading suspension. “The board wishes to inform shareholders of the company that there is no material development in the company as at now and it remains unaffected by the above event,” it says, adding that shareholders will be updated on any material development in the matter.

A market observer reckons that PIL being taken private is timely for Pentamaster as uncertainties loom over the semiconductor sector.

Several research houses downgraded the counter after Pentamaster’s 3QFY2024 earnings missed consensus estimates. AmInvestment Bank Research changed its call to a “hold” from a “buy”, with a lower target price of RM3.50 per share from RM5.50 previously.

“Until the group can secure new concrete revenue drivers, we forecast gradual growth ahead. We expect medical device revenue growth to normalise, unless sizeable new customers come on board. Hindered by overcapacity in the SiC (silicon carbide) sector, we also forecast a modest rebound in motor vehicle revenue. Changing coverage, we cut earnings by between 17% and 38%,” the research house says in a Nov 11 note to clients.

RHB Research has cut its earnings forecast for Pentamaster by 8%, 14% and 12% for FY2024, FY2025 and FY2026 respectively, on lower anticipated motor vehicle sector contribution. However, it has maintained its “buy” call, with a lower target price of RM5.10 per share, from RM5.95 previously, as it is still optimistic about the group’s prospects in benefiting from the AI-driven semiconductor sector.

Pentamaster’s share price has dropped 11% so far this year while PIL’s share price is down 20%. 

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