Domestic demand has been robust at this juncture on the back of incoming CNY festive season and replenishment of inventories with the expectation of stricter lockdown measures. We expect sales to the Middle East to recover slowly due to easing trade sanctions. However, the increase in raw material prices might pose a risk of shrinking margins moving forward. Reiterate HOLD with unchanged TP of RM28.17 based on 17x PE multiple on mid-FY22 earnings. Despite the uncertainties, we reckon PMM can weather thru this storm supported by its balance sheet strength.

We attended PMM’s meeting and came away feeling neutral about the group’s near term prospects going forward.

Sales outlook. Management shared that domestic demand has been robust at this juncture on the back of incoming CNY festive season and replenishment of inventories with the expectation of stricter lockdown measures. Even with the reintroduction of MCO2.0, the manufacturing facilities are scheduled to operate without any production constraint as it falls under “essentials”. For export market, we expect sales to the Middle East to recover slowly on the back of easing trade sanctions with Presidentelect Biden’s victory. Middle East contribution account for 23% of the group 1HFY21 (from 17% in 1HFY20). Note that the products sold to the region are high-margin products (vacuum cleaners and home showers). For ASEAN region, export to Vietnam has been resilient thanks to the country’s successful containment of the pandemic. However, demand from Thailand is slowing down due to the rise in Covid-19 cases.

Higher raw material costs. With the current volatile market, PMM decided to absorb the increase in raw material prices (see Figure #1-5) in order to maintain the sales volume. Note that raw materials consist of c.65% of the group COGS.

Delay in plant expansion. The expansion of the new wing that was initially scheduled to be completed by end-2020 has been delayed due to the halt during MCO in March 2020. It is now expected to be ready by end-Feb 2021 and subsequently start production in Oct 2021 (3QFY22) after obtaining approval from the authority and installation of 17 new plastic injection machines. PMM intends to use the space to accommodate more in-house injection plastic moulding activities to reduce its reliance on outsourced supply (currently supplying 80% of the production). Once commenced, we expect the group to benefit from further cost savings from this initiative.

Associate turnaround. PMM recorded the highest contribution from associate company of RM6m in 2QFY21 (vs -RM1.1m in 2QFY20). This was on the back of the successful restructuring of the associate company in reducing its operating cost (shutting down of some service centre) and lowering administrative expenses (MSS exercise). Management expects the normalised contribution to hover around the same level moving forward.

Outlook. While we are encouraged by the healthy demand for its products, we err on the side of caution premised on the possible reduction in discretionary spending with the reintroduction of MCO. Additionally, we opine the increase prices in key commodities might pose a risk of shrinking margin moving forward.

Forecast. Unchanged as the Meeting Yielded No Major Surprises.

Maintain HOLD, with unchanged TP of RM28.17 based on 17x PE multiple on midFY22 earnings. Despite the uncertainties, we reckon PMM can weather thru this storm supported by its balance sheet strength of a net cash position of RM474.1m (or RM7.80 per share) as end of Sept 2020.

Source: Hong Leong Investment Bank Research - 14 Jan 2021