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Thursday, May 25, 2017

Panasonic - Fan-tastic Fundamentals

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Highlights

  • Leading Consumer Electronics Manufacturer. Panasonic Manufacturing Malaysia (PMM) is a trusted consumer electronic manufacturing company which manufactures fans, kitchen appliances, vacuum cleaners and more, with an approximate 15% market share of Malaysia’s consumer electronics. The group is the leading manufacturer of fans in Malaysia, with an estimated market share of over 70%.
  • PMM has shown consistent historical growth, recording an impressive 10-year and 5-year net profit CAGR of 13.6% and 22% respectively due to the continuous launches of innovative products, the weakening Ringgit (as 60% of PMM’s sales are exports) and the transfer of certain product manufacturing from Japan and China to Malaysia.
  • Expanding PBT margins. PMM has shown impressive PBT margin expansion over the past five years from from 10.3% in FY12 to 17% in FY16. The group attributes this to succesful product launches, cost reduction measures, increasing operational efficiencies and favourable exchange rates (weaker ringgit).
  • Capacity Expansion. PMM plans to increase manufacturing capacity by 25% with the construction aimed at increasing volume for existing products and accelerating the development of local fit products as well as expanding into new markets. The group aims to complete this expansion by end-2018.
  • Net Cash Per share. As of 31/12/2016 (9M17), PMM has RM586m in net cash (and no borrowings), or RM9.66 per share.
  • Decent Dividend Yield . Over the past three years, PMM has averaged a payout ratio of 65%. Going forward, we project PMM to payout 60% of earnings. Based on this, a dividend yield of 3.8% represents a decent dividend yield.

Risks

  • Significant rise in key commodity prices
  • Strengthening of the ringgit would slow down export sales growth

Forecasts

  • We forecast net profit to be slightly lower in FY17 after an exceptional performance from the group in FY16 which saw net profit surge 48% yoy. We expect PMM to continue its impressive earnings growth, driven by overseas sales as it continues to benefit from the relatively weak ringgit level (forecasted at 4.40-4.55/USD for 2017)

Rating

Initiate with BUY recommendation; TP: RM43.20
  • PMM has shown robust growth, stable earnings track record, further room for growth (due to capacity expansion), healthy net cash position and a decent dividend yield.

Valuation

  • We initiate coverage with a BUY rating with a TP of RM43.20 tagged to a 17x FY19 EPS of RM2.54.
  • We believe PMM is undervalued at its current price. A 17x PE(x) is in line with its regional peers.
Source: Hong Leong Investment Bank Research - 25 May 2017

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