1QFY20 core PAT of RM28.0m (QoQ: +27.8%, YoY: -23.4%) was below ours and consensus expectations, accounting for just 22.7% and 20.9% of forecasts, respectively. The shortfall was mainly due to trade sanctions imposed by the US government on certain Middle East regions resulting in significantly lower sales. After factoring in weaker earnings from sales to the Middle East, we lower our FY20/21 earnings by 11.2%/4.2%. After our earnings adjustment, our TP falls from RM34.55 to RM30.70 based on an unchanged PEx of 17 of FY20 EPS of 180.6 sen. We downgrade our call from a Hold to a SELL. Although we are positive on PMM’s planned capacity expansion and net cash position of RM10.50, external headwinds beyond its control such as US trade sanctions on certain countries in the Middle East will continue to hamper near term results.

Below expectations. 1QFY20 core PAT of RM28.0m (QoQ: +27.8%, YoY: -23.4%) was below ours and consensus expectations, accounting for just 22.7% and 20.9% of forecasts, respectively. The shortfall was mainly due to trade sanctions imposed by the US government on certain Middle East regions which materially impacted sales.

Dividend. None Declared (1QFY19: None).

QoQ: Seasonally stronger sales (+29.1%) was due to both home appliances (+23.7%) and fan products (+33.1%). Better home appliance sales was attributed to increased export sales to other ASEAN countries while better fan product sales were due to Hari Raya festive period promotions. Note that 4Q is typically a seasonally weak quarter. Core PAT rose 27.8% in tandem with better sales.

YoY: Decline in home appliance sales (-15.9%) was mainly due to poorer sales to the Middle East, despite better home appliance sales to Vietnam, Philippines and Brunei. Weaker sales to the Middle East were due to trade sanctions imposed by the US government on certain countries in addition to liquidity issues faced by a major distributor in the region. Better fan product sales (+4.8%) were due to increased purchases at the distributor level pending a possible price adjustment in the following quarter. Core PAT declined 23.4% due to losses incurred by associate company (40% stake) which is involved in the sales of Panasonic branded products.

Prospects: Continued difficulties selling to the Middle East region is expected to impact PMM’s profitability. Furthermore, with distributors buying fan products before price increase in the coming quarter, we expect lower sales from the fan products division in the coming quarter. 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. After factoring in weaker earnings from sales to the Middle East, we lower our FY20/21 earnings by 11.2%/4.2%.

Downgrade to SELL, TP: RM30.70. After our earnings adjustment, our TP falls from RM34.55 to RM30.70 based on an unchanged 17x PE of FY20 EPS of 180.6 sen. We downgrade our call from a Hold to a SELL. Although we are positive on PMM’s planned capacity expansion and net cash position of RM10.50, external headwinds beyond its control such as US trade sanctions on certain countries in the Middle East will continue to hamper near term results.

Source: Hong Leong Investment Bank Research - 28 Aug 2019