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Wednesday, May 29, 2019

Panasonic Manufacturing Malaysia - Middle East Sales Issues

Author: HLInvest | Publish date: Wed, 29 May 2019, 9:46 AM

Reported FY19 core PAT of RM112.9m was below ours and consensus expectations, accounting for 91.4% and 86.6% of forecasts respectively. The results shortfall was due to poorer than expected sales to the Middle East region. We reduce our FY20/21 forecasts by 5.2%/4.8% to account for poorer sales to the Middle East region going forward. We maintain our HOLD call, albeit with a lower TP of RM34.55 (from RM36.50 previously) based on an unchanged 17x PE of FY20 EPS of 203.2 sen after earnings adjustment. We are positive on PMM’s planned capacity expansion, however, unfavourable sales outlook is expected to drag near term profitability.

Below expectations. Reported FY19 core PAT of RM112.9m was below ours and consensus expectations, accounting for 91.4% and 86.6% of forecasts respectively. The results shortfall was due to poorer than expected sales to the Middle East region.

Dividend. 211 sen declared, going ex on 6/9/19 (4QFY18: 233 sen; 100 sen special and 133 sen final). This brings FY19 DPS to 226 sen (FY18: 248 sen).

QoQ: Sales declined -21.6% due to poor domestic and export home appliances sales. Despite significantly lower sales, core PAT grew 2.7% due to significantly lower effective tax rate of 9.0% (vs. 20.5% in 3QFY19). The main reason for the favourable tax rate was due to tax deductible R&D expenditure.

YoY: US trade sanctions and distributor issues in the Middle East caused sales to the region to plummet (-43.6%), in turn reducing overall top line by -18.5%. Additionally, poorer margins in the home appliances segment (4QFY19: 9.9% vs 4QFY18: 12.7%) was due to rising raw material cost and unfavourable sales mix. Despite tax incentives, a combination of thinner margins and lower sales resulted in core PAT declining -7.7% to RM21.9m.

YTD: Core PAT was lower by -8.5% at RM112.9m of the back of revenue decline of - 5.9%. We note that political issues have led to difficulties selling to the Middle East, resulting in sales to the region declining by -21.6%. This led to significantly lower home appliance margins as PMM sell high margin products to the Middle East.

Prospects: Continued difficulties selling to the Middle East region is expected to impact PMM’s profitability. Furthermore, we expect the slowdown in the domestic property market to affect sales as property developers remain key clients, particularly for the fan products division. Operationally, PMM has announced the expansion of a new wing, expected to increase production capacity by 18%. PMM intends to use the space to reduce their reliance on external part makers by increasing their capacity of making appliance parts in house.

Forecast. We reduce our FY20/21 forecasts by 5.2%/4.8% to account for poorer sales to the Middle East region going forward.

Maintain HOLD, TP: RM34.55. We maintain our HOLD call, albeit with a lower TP of RM34.55 (from RM36.50 previously) based on an unchanged 17x PE of FY20 EPS of 203.2 sen after earnings adjustment. We are positive on PMM’s planned capacity expansion, however, unfavourable sales outlook is expected to drag near term profitability.

Source: Hong Leong Investment Bank Research - 29 May 2019

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