We met with PMM and came away feeling neutral about the group’s prospects. PMM intends to reduce their reliance on manual labour by investing in automation. The ongoing capacity expansion should allow the group to reduce their reliance on external manufacturers and increase production output. Despite this, we only expect significant increased production volume by FY21 at the earliest. We keep forecasts unchanged as the meeting yielded no surprises. Maintain HOLD with an unchanged TP of RM38.75 based on 17x PE of FY20 EPS of 227.9 sen.

We met with PMM and came away feeling neutral about the group’s prospects going forward.

Sales outlook. 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 (Figure 1). Panasonic expects Vietnam and Philippines to grow as urbanisation in these countries are expected to result in increased shower heater and ceiling fan sales. Domestically, slowdown in the domestic property market is expected to affect sales as property developers remain key clients, particularly in the fan products division.

Input costs. We estimate that aluminium, copper and steel make up 60-70% of PMM’s raw material cost (Figure 2-4). Unsurprisingly, EBIT margins in 6M19 slimmed considerably from higher commodity costs (EBIT margin: 6M19: 12.1%, 6M18: 13.3%). Despite this, declining commodity costs in recent months are expected to provide relief to the group’s margins. Furthermore, as PMM rely on their global Panasonic group of companies to procure raw materials, we expect the operating profit margins to improve in 2H19.

Capacity expansion. PMM have recently announced the completion of a new wing, which is expected to increase their Shah Alam production plant area by approximately 18%. The increased area is to be used to move the manufacturing of certain parts in house, reducing their reliance on external manufacturers. PMM guided that some parts manufactured externally have reliability issues. Currently, PMM shared that the factory is already working at close to maximum capacity. Going forward, PMM intends to increase capacity by another 41% by building an extension which is expected to cost RM103.0m. This project is expected to be completed by 2020. PMM intends to use the larger production area as an injection moulding facility and research and development operations.

Outlook. PMM intends to reduce their reliance on manual labour by investing in automation. The ongoing capacity expansion should allow the group to reduce their reliance on external manufacturers and increase production output. Despite this, we only expect significant increased production volume by FY21 at the earliest.

Forecast. Unchanged.

Maintain HOLD, TP: RM38.75. We maintain our HOLD call with an unchanged TP of RM38.75 based on 17x PE of FY20 EPS of 227.9 sen.

Source: Hong Leong Investment Bank Research - 12 Dec 2018