PMM’s 4Q18 Core PAT of RM123.3m was below ours and consensus expectations mainly due to higher than expected raw material cost. A final dividend of 133 sen along with a special dividend of 100 sen was declared. Going forward, we expect PMM to face margin erosion from stronger ringgit due to their exposure to the export market, as well as pricier raw material cost. We lower our FY19/20 forecasts to account for more expensive raw material cost going forward. We maintain our BUY call, maintain our TP of RM41.65 based on 17x FY20 EPS of 245 sen after we roll over our valuation year from FY19 to FY20.

Below expectations. Reported 4Q18 core PAT of RM123.3m was below ours and consensus expectations, accounting for 91.1% and 88.5% of full year forecasts respectively, mainly due to higher than expected raw material cost.

Dividend. 233 sen per share was declared (100 sen special and 133 sen final), brining full year to 248 sen.

QoQ: Core PAT declined 36.0% to RM23.7m as a result of higher raw material cost and poorer home shower sales, which are seasonally stronger in 3Q.

YoY: Core PAT rose 8.9% from RM21.8m to RM 23.7m mainly due to higher revenue, favourable sales model mix and increased home shower sales, mainly to Vietnam.

YTD: PMM grew top line by 6.8% as a result of higher sales of vacuum cleaners (mainly to the Middle East), electric irons, shower products and ceiling fans. Despite better sales, core PAT declined 6.5% due to higher raw material cost, unfavourable sales mix, and lower contribution from PMM’s associate trading company.

Prospects: Panasonic face considerable headwinds ahead due to (i) strengthening ringgit as majority of its export sales are denominated in foreign currency and (ii) increasingly expensive key commodities (aluminium, steel, copper). Despite this, we expect higher profitability from the manufacturing of rice cookers going forward.

Forecast. We reduce our FY19/20 earnings forecasts by 10.3%/4.6% to account for higher raw material costs going forward.

Maintain BUY, TP: RM41.65. After rolling over our valuation year to FY20 and adjusting our earnings, our TP is maintained at RM41.65 based on unchanged P/E of 17x based on FY20 EPS of 245 sen. Maintain BUY call.

Source: Hong Leong Investment Bank Research - 22 May 2018