Reported 6MFY19 core PAT of RM69.7m was below ours and consensus expectations, accounting for 51.5% and 47.1% of forecasts respectively. We reduce our FY19/20/21 earnings forecasts by 2.2%/11.0%/11.9% to account for tepid sales outlook going forward. Post earnings adjustment, we lower our TP from RM43.50 to RM38.75 based on an unchanged 17x PE of FY20 EPS of 227.9 sen. We downgrade our call from a Buy to a HOLD.

Below expectations. Reported 6MFY19 core PAT of RM69.7m was below ours and consensus expectations, accounting for 51.5% and 47.1% of forecasts respectively. We deem this below expectations are we anticipate 2HFY19 to be a significantly weaker from the absence of sales tax holiday and slowing export sales.

Dividend. Interim dividend of 15 sen was declared, going ex on 26/12/18 (2QFY18: 15 sen).

QoQ: Lower core PAT of 9.2% was predominantly due to lower contribution from the fan products category.

YoY: Core PAT grew 38.1% to RM33.2m of the back of 11.3% growth in sales. Profitability was mainly driven by better contribution from the fan products division which saw EBIT balloon 73.4%. However, we note that while home appliance sales grew 2.6%, home appliance EBIT contracted 14.3%. The poorer performance was due to higher raw material cost (figures 2-4) and unfavourable product sales mix. Domestically, the tax holiday period resulted in higher local fan (+62%) and home appliances sales (+8%).

YTD: 11.4% growth in core PAT was attributed to larger domestic sales, spurred by the tax holiday between June and August. Strong local sales (+16.7) more than mitigated lacklustre export sales (-8.8%).

Prospects: Increasing trade sanctions to countries in the Middle East is expected to impact PMM’s ability to sell to the region. We note that sales to the Middle East have already declined 6.0% in 6MFY19 vs SPLY. Middle East accounted for 24.2% of PMM’s total sales in FY18. 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 FY19/20/21 earnings forecasts by 2.2%/11.0%/11.9% to account for the challenging sales outlook going forward.

Downgrade to HOLD, TP: RM38.75. Post earnings adjustment, we lower our TP from RM43.50 to RM38.75 based on an unchanged 17x PE of FY20 EPS of 227.9 sen. We downgrade our call from a Buy to a HOLD. We are positive on PMM’s planned capacity expansion, however, unfavourable sales outlook and rising raw material cost is expected to drag near term profitability.

Source: Hong Leong Investment Bank Research - 27 Nov 2018