HLBank Research Highlights

Panasonic Manufacturing Malaysia - Still Grappling

HLInvest
Publish date: Mon, 08 Nov 2021, 09:48 AM
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This blog publishes research reports from Hong Leong Investment Bank

Despite the allowance to resume of operations at full capacity, PMM is facing headwinds with supply and manpower constraints. We expect PMM to face margin squeeze on the back of elevated raw material prices. With the shortage of labour, we view that PMM would face additional cost from the increase in allowances for temporary and outsourced workers in order to mitigate this impact. We lower our FY22/23 forecast by -10%/-3% to account for heighted raw material prices coupled with higher prosperity tax. Reiterate HOLD with lower TP of RM30.11 based on unchanged 17x PE multiple on FY22 earnings. Despite the uncertainties, we reckon PMM can weather thru this storm supported by its balance sheet strength.

We came from PMM’s meeting feeling cautious about the group’s near term prospects going forward.

Operations partially restored. Management shared that production has resumed operation in August with 100% workforce after the easing of restrictions. However, the operations still face supply and manpower constraints. Currently, parts manufacturing are running at 85% utilization rate based on 24 hours production. Assembly on the other hand, is running on single shift.

Limited product supply for Panasonic Malaysia. We gather that PMM’s subsidiary Panasonic Malaysia – whose principal activities are the sales and marketing of Panasonic products in Malaysia – are facing product supply constraint. We understand that sales in Aug-Oct 2021 were affected by the limited supply of products from local and overseas suppliers. Despite the further relaxation of being allowed to resume business, dealers especially those located in shopping malls are still facing hurdles with muted footfall. Note that 1QFY22 associate contribution plunged to losses of -RM500k vs RM13.3m in 4QFY21 as sales were confined to only online channel.

Raw materials trending upwards. PMM main raw materials which include copper, aluminium and steel have recorded an upward increase of 42%-70% as compared to Oct 2020. To mitigate the impact, the group have taken several measures of (i) accelerate cost reduction activity; (ii) continue to trim fixed cost expenses; and (iii) increase in-house production for injection moulding. Note that raw materials consist of c.65% of the group’s COGS. Additionally, we understand that PMM have started to increase the price of its products by 5-10% in line with the market trend.

ESG initiative. PMM are expanding to install solar panel at SA1 plant car park and new SA2 plant production building roof top. The group is also acquiring Air Conditioning and Mechanical Ventilation (ACMV) System and Variable Refrigerant Flow (VRF) Air Conditioning Facilities for high energy efficiency and better environment at the SA2 plant building.

Outlook. We expect PMM to face margin squeeze on the back of elevated raw material prices. Additionally, with the shortage of labour due to restriction on the recruitment of foreign workers, we view that PMM would face additional cost from the increase in allowances for temporary and outsourced workers to mitigate this impact.

Forecast. We lower our FY22/23 forecast by -10%/-3% to account for heighted raw material prices coupled with higher tax rate from the prosperity tax.

Maintain HOLD, with lower TP of RM30.11 (from RM33.44) based on unchanged 17x PE multiple on FY22 earnings. Despite the uncertainties, we reckon PMM can weather thru this storm supported by its balance sheet strength of a net cash position of RM517.3m (or RM8.50 per share) as end of June 20

 

Source: Hong Leong Investment Bank Research - 8 Nov 2021

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