Highlights

• We met with Panasonic management and came away feeling positive about the group’s prospects going forward.
• Rice cooker segment turning profitable: Management guided that the rice cooker segment (which was transferred to PMM from Thailand 2 years ago) reported a loss of RM8m in FY17, as PMM struggled to implement a cost effective manufacturing approach. However, PMM have guided that it has successfully improved its manufacturing process, and the segment will improve gradually and breakeven in FY18.
• Vacuum Cleaner sales rebounding: In FY17, sales of vacuum cleaners to the Middle East region fell significantly citing political conflict in the region. However, management guided that vacuum cleaner sales in 1Q18 rebounded very strongly, far surpassing PMM’s internal targets. In January 2017, Nikkei Asian Review reported that Panasonic ceased manufacturing vacuum cleaners in North America and the vacuum cleaners sold in North America will be sourced from PMM Malaysia instead.
• Market Share: PMM guided that the group continues to occupy significant domestic consumer electronic market with market share data shown in figure 1.
• Key commodity prices: As shown in Figure 2, prices of key commodities for the group have risen significantly YTD, which will in turn result in higher input costs. To battle the rising input costs, management shared that it has raised selling price by circa 5% since the start of April.
• 25% capacity expansion: Currently the expansion is to accommodate increased manufacturing of current products but does not rule out the possibility of getting products transferred from overseas to Malaysia. (which happened with rice cookers two years ago and meat grinders recently)
• Prospects: Despite the rise in key commodities in recent times, we expect the negative impact to be offset by 1) Rice cooker manufacturing turning profitable in FY18. 2) Rejuvenation of vacuum cleaner sales and 3) Raised prices.

Risks

• Strengthening of the ringgit would slow down export sales growth.

Forecasts

• Unchanged.

Rating

BUY (↔) TP: RM43.20

• PMM has a stable earnings track record, further room for growth (due to capacity expansion), healthy net cash position (RM9.92/share) and a decent dividend yield.

Valuation

• We maintain our BUY rating with an unchanged TP of RM43.20 tagged to 17x FY19 EPS of RM2.54.
• We believe PMM is undervalued at current share price. A 17x PE(x) is in line with its regional peers.

Source: Hong Leong Investment Bank Research - 19 Jun 2017