PMM registered 1QFY23 results with revenue of RM243.7m (QoQ: +16.7%; YoY: - 3.9%) and core PAT of RM8.8m (QoQ: -42.3%, YoY: -50.6%). This came in below expectations at 11% of our and consensus full year forecasts. The disappointment was due to margin deterioration on the back of higher operating costs with elevated raw material prices and labour costs. We expect challenges from muted sales, rising raw material costs and higher operating expenses to persist for the remainder of the year. The group is expecting to incur about 6-7% revenue impact from the termination of rice cooker and kitchen appliances products. We revise FY23/24 earnings downward by -18%/-19%. After earnings adjustment our TP decreases from RM22.33 to RM18.20 based on an unchanged 17x PE of FY23 EPS. Maintain SELL.

Below expectations. PMM registered 1QFY23 results with revenue of RM243.7m (QoQ: +16.7%; YoY: -3.9%) and core PAT of RM8.8m (QoQ: -42.3%, YoY: -50.6%). This came in below expectations at 11% of our and consensus full year forecasts. The disappointment was due to margin deterioration on the back of higher operating costs with elevated raw material prices and labour costs. Core PAT was arrived after adjustments for forex gain (-RM2.9m) and derivative loss (+RM157k).

Dividend. None (1QFY22: None). PMM typically declares dividend in 2Q and 4Q.

QoQ. Revenue rose +16.7% to RM243.7m thanks to the improvement in heating & ventilation (HVAC) segment (+41.0%), that more than offset the decline in living appliances and solutions (LASC). Note that 4QFY22 was also impacted by the flood incident which results in lower production and manufacturing activities. Despite better sales, core PAT plunged by -42.3% to RM8.8m on the back of (i) lower revenue; (ii) EBITDA margin contraction by 2.1ppt due to rising cost of raw materials; and (iii) lower contribution from associated company by -46.5% due to unfavourable lower margin products mix.

YoY. Top line eased by -3.9% dragged by LASC segment (-30.3%) despite improvement in HVAC (+9.7%). The lower revenue was attributable to (i) LASC experienced a slowdown in sales of certain kitchen appliances products as the production of these products will be terminated in 1HFY23; (ii) discontinuance of rice cooker business; and (iii) disruption in supply chain in China from where certain components were sourced. Bottom line dipped further by -50.6% attributable to (i) lower revenue; (ii) elevated raw materials; (iii) higher production cost impacted by unstable parts supply, especially imports from China; and (iv) higher labour costs from the imposition of higher minimum wage from May 2022.

Outlook. We expect challenges from muted sales, rising raw material costs and higher operating expenses to persist for the remainder of the year. The group is expecting to incur about 6-7% revenue impact from the termination of rice cooker and kitchen appliances products. Note that the rice cooker segment has been suffering losses for the past years. As for the flood incident, the insurance claimed so far only covers 49% of the total loss with remaining amount still under review. To mitigate the rising costs, there will be further price hikes for its products in 2H22.

Forecast. We cut our earnings by -18%/-19% in FY23/24 in anticipation of weaker margins overall. FY25 figures are introduced.

Maintain SELL, with lower TP of RM18.20 (from RM22.33) based on 17x PE multiple on FY23 earnings. We reckon that the multiple headwinds to persist and would pose a challenge to PMM earnings moving forward.

Source: Hong Leong Investment Bank Research - 23 Aug 2022