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Author: MR. BEAN   |   Latest post: Tue, 28 Sep 2021, 12:02 AM

 

PENSONI – FANTASTIC PERFORMANCE FOR FY 2022 (EMS PLAYER)-GEM

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Pensonic has struggled for years with declining revenue and margins. However, for the past 12 months, the stock has been roaring. Year-to-date, the stock is up 16% and up 100% over the past 1 year. The rebound was proportionate to Pensonic’s improved financial performance in the recent few quarters. The Group close FY2021 at a record high profit of RM16m.

The stellar results were driven by increased spending by the Malaysian consumers on home improvement products as they seek better living conditions when most time is now being spent indoors.

In this article, we will explore the value of the Group’s business and discuss their prospects and valuation, so readers could reach their own informed decision. Are these good times for Pensonic sustainable?

Listed on Bursa Malaysia since 1995, Pensonic Holdings Berhad (“Pensonic”) is an established local manufacturer, importer, exporter, and distributor of electrical home appliances. The Group distributes its products locally via an extensive distribution network of more than 900 dealers and lately, via online channels. Further, Pensonic also exports to ASEAN countries and the Middle East regions.

For the past 5 years, Malaysia has always been Pensonic’s main market, contributing about 70% of the Group’s revenue, followed by ASEAN (23% – 30%), Middle East (~5%), and others.

Based on Pensonic’s e-store, the Group has more than 200 product SKUs including, washing machines, multicooker, table fan, electric kettle, hairdryer, blender, water heater, and chest freezer, etc.

For several of the higher demand products, Pensonic designs signature series to meet consumers’ discerning tastes and demands. The current favorites are the Batik series, Toush series, Chef’s Like series, and Amber Chia Mesmerized series for hairdryers & hair styling products, etc.

The Group’s operation can be categorized into two main segments i.e. manufacturing and trading.

Manufacturing segment
In Penang, the Group has its own manufacturing plant with a built-up area of 75,000 sq. ft. where they manufacture its flagship products such as fans, mixers, and blenders in-house. We believe that the manufacturing of other products is outsourced from third-party vendors.

We have no complete information regarding the Group’s production capacity and/or breakdown in terms of products manufactured in-house and sourced from third parties.

Trading segment

The Group owns 3 brands in Malaysia/Singapore i.e. Pensonic as its core brand, Lebensstil Kollektion from Germany and Cornell from the USA. Lebensstil Kollektion targets the higher-end market, while Cornell targets the mass affluent market, marketing high-quality affordably priced products.

On the other hand, the Group is also the sole distributor for several internationally renowned household brands, such as GAGGIA coffee machines, Morphy Richards and Belling, both for the Malaysia and Singapore markets.

The Group’s main distribution channel has always been through a network of dealers, wholesalers, departmental and chain stores, supermarkets, and hypermarkets. Since 2018, the Group ventured into online distribution channels by setting up its own e-store and an official store on Shopee.

On the international front, Pensonic works closely with local distributors to promote its products.


RECENT KEY INITIATIVES

  • Emphasis on e-commerce channel. The pandemic outbreak has led the management to realise the importance of e-commerce distribution. In its latest annual report, the management has indicated committment to retrain its employees and redeploy the team to strengthen and grow on the Group’s e-commerce platforms.
  • Expanding the Toush series line-ups. In 2019, Pensonic was the first local brand to venture into smart IoT products, when they introduced the ‘Toush’ series appliances. Since then, Pensonic has been adding more to its range of product line-ups i.e. smart door locks, cameras, plug tops, controllers and on-off switches.

    The management sees great potential in this space as newer generation family owners would prefer IoT-enabled appliances. In the pipeline, Pensonic is launching more smart appliances such as ceiling fans, washer dryers, portable air-conditioning, water dispensers, and cookers.
  • Increasing exposure in the overseas market. Before the pandemic, the management had plans to ramp up on its venture abroad as they see a huge market for IoT smart home appliances. They were planing to expand footprints across more countries in the ASEAN, Middle East and Africa region, by leveraging on its existing strengths as a manufacturer cum distributor. However, the plan has since delayed due to the outbreak of Covid-19.
  • Venturing into Indonesia. In FY2019, the Group established a subsidiary in Indonesia with the intention of setting up a manufacturing and/or assembly plant to set its foots into the Indonesian market. However, the plan has since been put on hold for the same reason above.

MANAGEMENT TEAM

Dato’ Seri Chew Weng Khak (“Dato’ Seri”), aged 78 is the founder and Group Executive Chairman of Pensonic Group. For more than five decades, Dato’ Seri has steered the Group from a small family business into a leading home-grown electrical home appliances manufacturer and distributor. Dato Seri is the father of Dixon Chew, Vincent Chew and Nelson Chew.

Mr. Chew Chuon Ghee, Vincent, aged 48 joined the Group in 1995/6 is currently the Group Managing Director. He held the Group MD position since 2014. Besides taking charge of the overall management, he also assists with the Group’s sales and marketing strategy. He served as a member of the Executive Committee to Branding Association Malaysia (BAM) from 2009 to 2012 and as the Vice President from 2012 to 2015. Further, he has also been serving as the Chairman of the Malaysian Electrical Appliances Distributors Association (MEADA) since 2015.

Mr. Chew Chuon Jin, Dixon, aged 51 is the Group Chief Executive Officer. He manages the export and original design manufacturing (“ODM”) business. He joined the Group in 1993.

Mr. Chew Chuon Fang, Nelson, aged 44 is the Group Executive Director. Graduated from the Eastern Michigan University in the USA, Nelson joined the Group in 1999. His role in the Group centers around corporate branding, public relations, and marketing strategist. He also oversees the marketing and quality assurance as well as operations of two (2) subsidiaries, namely Pensonic Parts & Service Sdn Bhd and Pensonic (H.K.) Corporation Limited.


PAST YEARS FINANCIAL RESULTS

Note:
1. During FY2018, certain subsidiaries within Pensonic were approved for extension to its tax pioneer status up to FY2022. However, the terms of the incentives were revised whereby only partial exemption of their statutory income was allowed, instead of full exemption. The revision was retrospective with effect from 1 June 2012.

In this regard, Pensonic was required to repay the underprovision of tax liabilities for the previous FYs in FY2018. The Group has since submitted several appeals, however, there has been no successful outcome thus far. For purpose of the analysis, we excluded the one-off tax expenses of RM6.8m being a reversal of previous years’ tax incentives.

2. In July 2019, the Group disposed of a piece of leasehold land together with a 4-storey office building for RM19.5m. For purpose of analysis, we excluded the one-off gain from disposal of RM9.4m.

3. The Group’s financial year ends on 31 May.

Since FY2016, Pensonic’s revenue has been on 5 years decline, shrinking by 27% from RM386m to RM280m in FY2020. The significant year-on-year (“y-o-y”) decline was obvious in FY2020, by as much as RM44m / 13.5%.

In terms of profitability, Pensonic’s gross and operating margins were stable throughout the years, ranging between 18% – 22% and 2% – 4% respectively (excluding FY2020 from analysis). However, we are concern about the Group’s marginal profitability (<5%) and its declining trend since FY2016.

The deteriorating margin can be attributable to Pensonic’s shrinking revenue and gross margins. When top-line declines and operating costs remain about the same, it is inevitable for the Group’s net margin to be squeezed. As seen, Pensonic’s net margin was squeezed from 3% in FY2016 to only 0.2% in FY2019.

Having said that, we draw some optimism from the Group’s better control of operation cost, mainly savings derived since its venture into online distribution channels. As tabulated below, Pensonic’s selling & distribution (“S&D”) expenses to sales ratio have been declining over the years, from 10% to 7.6% in FY2020. The Group’s total operating cost declined at a 4-year CAGR of 6.1% from RM65.7m in FY2016 to RM51.2m in FY2020. The S&D expenses decline was at a CAGR of 14.2%.


9M FY2021 RESULTS (Dec ’20 – Feb ’21)

For the past 9 months in FY2021, the Group recorded an impressive improvement in its overall performance following the surge in consumers’ demand for electrical home appliances and overall reduction of the Group’s operation cost.

With the Group’s gross margin maintained at 20%, coupled with a lower operating cost, Pensonic’s operating margin improved to 6.6% as of 9M FY2021. If we were to annualize the Group’s FY2021 results, we can expect the Group to close the financial year at a record high net profit of about RM15m.

For the past 5 years, the Group consistently generates surplus cash from operations. In most years, CFO to net income ratios was above 2x.

In terms of FCF, the deficits in FY2018 and FY2019 were due to the Group’s CAPEX for expanding its warehousing operations in Klang, Selangor. The central warehouse should have completed in 1Q2021.

The plan was to consolidate its warehousing operations in Klang for better inventory management, savings from discontinuing third-party warehouse rentals, and a more efficient logistic arrangement given the strategic location to key market regions i.e. Klang Valley, Johor Bahru, and export market (close to the port).

The Group’s debt profile is mainly comprised of short-term debts i.e. working capital financing to fund its operating cash cycle (“OCC”). The reduction in short-term debt in FY2020 was directly attributable to the lower OCC days as the Group had lower inventory on hand.


STRENGTHS AND OPPORTUNITIES

  1. Established brand in Malaysia with more than 25 years of business presence. The brand is known for its reliable affordably priced products. Cornell has built the same reputation as Pensonic in Singapore.
  2. Business generates strong cashflow from operations. We expect the Group’s profitability to further strengthen/sustain at a about 4% – 5% net margin moving forward. This is a result of the management effort and discipline since FY2016 to bring down its overall operation cost.
  3. Demand of home electrical appliances appears to remain strong in the medium term as indicated by the management and its peers i.e. Panasonic and Khind. Senheng upcoming IPO may also shed some light on the prospect of the industry.
  4. Growth in the smart IoT segment could possibly be Pensonic’s next growth catalyst as consumers’ demand shift towards energy saving and IoT enabled appliances.
  5. Experienced management team with succession plans in place.

WEAKNESSES AND THREATS

  1. Highly competitive market with a low barrier of entry. In recent years, competition has picked up aggresively as e-commerce provided consumers the convenience and option to purchase products from various brands across the globe. Given these products are usually generic in nature, Pensonic does not any strong competitive advantage and/or economic moat to fend off its competitors.
  2. Poor profitability track record. For the past 10 years, we note that the Group’s margin has always been marginal between 1.0% – 3.0%. The Group made a loss in 2 financial years i.e. FY2012 and FY2020, over the last decade.
  3. The strong growth in consumer demand may not be sustainable and could start to taper in the near term.
  4. The Group’s failure to expand its overseas business may detriment on its long-term prospect. The Malaysia market is saturated and it offers no/minimal prospect for growth.

MAJOR SHAREHOLDERS AS AT 21 AUGUST 2020

Dato’ Seri Chew, the founder and current Group Managing Director, owns a 24.7% stake in Pensonic. Separately, his three sons hold a total stake of 16.5% in the Group. On aggregate, the family controls about 41% of the Group.

The only investment fund that has a stake in them is GV Asia Fund Limited. Based on the distribution schedule, Pensonic has 2,524 shareholders, of which the top 103 shareholders control 78.3% of the Group.

Interestingly, the Group actually spent >RM1.5m over the last 12 months on share buybacks. Based on the last announcement on 2 June 2021, it was disclosed that the Group bought back a total of 3,294,100 shares / 2.54% of the total number of issued shares capital to date.   


PEERS COMPARISON

For comparison purposes, Panasonic and Khind would be the closest and most comparable peers to Pensonic in Malaysia. Based on the above, we would conservatively ascribe Pensonic a PE range of 7x – 10x at best.


VALUATIONS

Assumptions:
1. FY2022 base case revenue was estimated on the assumption of RM80m
 per quarter. The best and worst cases were projected on a +10% and -5% variance respectively. We expect demand for home appliances products to remain strong in the near term.
2. GP margin was projected to remain stable at about 20%. For the past 6 years, the Group’s GP margins were consistent between 18% – 22%. 9MFY2021 GP margin was 20%.
3. The Group’s fixed operating cost has been on a decline since FY2016. We projected FY2022 operating cost by annualizing 9MFY2021 operating cost (RM33.3m x 4/3). We may expect a further reduction in the Group’s operating cost as they save on better warehousing operations and as more sales are derived via online channels (savings on distributors’ commissions).
4. For the last 5 years, the Group’s net finance cost has been around RM4m – RM5m. However, for the 9MFY2021, the Group’s net finance cost was reduced to RM2.5m (annualized RM3.3m) only. The drop was directly attributable to savings from better inventory management (lower OCC days).
5. The Group enjoys partial tax incentives. Our 18% estimate rate was based on FY2020 and 9MFY2021 effective tax rates.
6. FY2016 – FY2019 net margin ranged between 0.2% – 3.0% only. 9MFY2021 net margin achieved a record high of 4.6%. We are optimistic for the Group’s net margin to remain strong in FY2022 as demand is expected to sustain.
7. Diluted number of shares excluded the portion of treasury shares held by the Group (Treasury shares – 3.3m)

At today’s closing of RM0.69, Pensonic is trading at the low range of our target price.

Nevertheless, in view of Pensonic’s poor economic moat, undemanding profitability (margin of <5%), and the limited growth prospects forward, we are not very much interested to own a stake in the business. In our view, Pensonic is more of a target for short term trade.

We recommend investors to consider a healthy margin of safety (>30%) when investing in businesses like Pensonic.

 

 

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Chart Stock Name Last Change Volume 
PENSONI 0.705 +0.015 (2.17%) 126,000 

  VenFx likes this.
 
charliie After supporting Pensonic over the years, the product life is short lived compared to its competitive price. Especially for the motors. I had since changed to China's electronics products which had creditably improved to the years.BTW, I am still using a Cornell microwave for a longer time.
28/09/2021 4:46 PM
The_JQuestion collect when cheap only not bad la
29/09/2021 3:05 PM
The1994Investor Please respect and do not plagiarise content from our blog. Appreciate
29/09/2021 9:41 PM


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