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Monday, August 13, 2018

Panasonic Manufacturing Malaysia - Manufacturing Growth

Author: HLInvest | Publish date: Mon, 13 Aug 2018, 09:14 AM

Better forecasted sales from recovering markets such as the Middle East and R&D tax deductions are expected to mitigate higher key commodity prices. We raise our FY19/20 forecasts by 2.2%/2.0% to account for tax savings. Out TP is raised from RM41.65 to RM43.50 after earnings adjustment. Maintain BUY call.

FY18 recap. Revenue grew 7% in FY18 vs FY17 mainly due to rebounding sales of vacuum cleaners to the Middle East markets (Sales to the Middle East, FY18: RM289.9m vs FY17: RM 229.7m). Despite this, unfavourable sales mix in the fan products division resulted in PAT declining from RM131.9m to RM123.3m.

Sales outlook. Economic recovery in the Middle East should bode well for the group going forward, given that PMM predominantly sells vacuum cleaners (a high margin product) to the Middle East. Additionally, weaker ringgit levels post GE 14 should result in higher realised sales as >60% of the group’s sales are exported.

Input costs. Aluminium, copper, steel and resin comprise 60-70% of PMM’s COGS. As shown in below (Figures 1, 2 and 3), these commodities have risen considerably YTD, which will result in higher input costs for the group. However, as PMM relies on their global Panasonic group of companies to procure raw materials, we expect their GP margin to remain relatively stable in FY19. Note that GP margin was slightly higher in FY18 vs FY17 (20.2% vs 19.9%) despite considerably higher aluminium, copper and steel commodity prices.

Minimum wage impact. As of end-FY18, PMM has a total of 2,618 employees (1,311 local, 727 foreign, 165 outsource, and 415 temporary staff). Given the heavy reliance on foreign and temporary staff, we expect the occurrence of a hike in minimum wage to have a significant impact on the group’s earnings. Our sensitivity analysis estimates PAT would decrease by 1.8% for every RM100 increase in the monthly minimum wage.

Prospects. The company expects to increase their Shah Alam plant production area by approximately 18%. Currently, PMM guide that the factory is already working at close to maximum capacity. Additionally, the company recently undertook a re organisation of the Product Development Engineering Department which allows the company to claim for double tax deduction on R&D expenses, estimated to result in annual tax savings of RM8.5m.

Forecast. We increase our FY19/20 forecasts by 2.2% and 2.0% to account for lower expected effective tax rate from the tax deductions mentioned above.

Maintain BUY, TP: RM43.50. Post earnings increase, our TP is raised to RM43.50 from RM41.65 based on 17x PE on FY20 EPS of 256 sen. Maintain BUY call.

Source: Hong Leong Investment Bank Research - 13 Aug 2018

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