We Met With PMM and Came Away Feeling Neutral About the Group’s Prospects Going Forward. Going Into FY20, We Expect Tepid Sales to the Middle East (due to US Trade Sanctions) to be Partially Mitigated by Stronger Home Shower Sales to the SEA Region. Our Forecasts Remain Unchanged. Our SELL Call and TP of RM30.70 Based on An Unchanged 17x PE of FY20 EPS of 180.6 Sen Remains.

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

Sales outlook. Going into FY20, we expect sales to the Middle East to remain tepid, given the trade sanctions in the region compounded by ongoing issues with major distributors in Iran and Saudi Arabia. After declining 21.6% in FY19, sales to the region made up just 20.1% of total sales (from 24.2% in FY18). We note that the majority of products sold to the region are high margin products such as vacuum cleaners and irons. However, PMM expects to make up for the loss of sales to the Middle East with sales of home showers to countries in SEA, particularly to Vietnam and Philippines. Note that PMM is the only Panasonic manufacturer in SEA that manufactures home showers.

Lower raw material costs expected. PMM shared they expect to realise lower raw material costs in FY20 due to cheaper prices in key commodities (Figure 1-5). Note that raw materials make up approximately 65% of COGS. We understand PMM typically hedge their raw material costs three months in advance.

Lower labour cost from better automation. PMM shared they expect to reduce their reliance on physical labour with increasing investment in automation. We are positive on this strategy as we understand the increasing reliance on robotics will not only allow them to move a lot of manufacturing processes in-house (which used to be subcontracted out to independent contractors given the lack of capacity), but also result in a significant reduction in defective sub parts from external manufacturers. Note that PMM has successfully reduced their headcount from 2,816 in FY17 to ~2,400 currently. In the coming five years, in addition to maintenance capex, PMM expects to invest RM191m in special projects including robotics, resin injection facilities, and a new warehouse.

Prospects. Continued difficulties selling to the Middle East region is expected to impact PMM’s near term profitability. Despite this, we are positive on PMM’s long term vision on increasing automation given the expected higher minimum wages in the coming years.

Forecast. As the meeting yielded no major surprises, we keep our forecasts unchanged.

Maintain SELL, TP: RM30.70. Our SELL call and TP of RM30.70 based on an unchanged 17x PE of FY20 EPS of 180.6 sen remains unchanged. Although we are positive on PMM’s planned capacity expansion, increasing automation efforts and net cash position of RM10.50 per share, 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 - 24 Sept 2019