• Lower profit margin from home appliance segment impacted 2QFY17 normalised earnings

• 1HFY17 financial performance came in at the lower end of our expectation

• Announced 2QFY17 dividend of 15sen per share

• Maintain NEUTRAL with revised TP of RM35.32 per share

Weaker quarterly performance. Panasonic Manufacturing Malaysia Berhad’s (Panasonic) 2QFY17 normalised earnings came in at RM34.7m, a decrease of -30.8%yoy. This was mainly due to higher operating expenses mainly from the manufacturing of home appliance products and lower share of profits from the associated company. As a results, profit after margin reduced to 10.5% from 14.4% in 2QFY16.

1HFY17 earnings lower than expected... The decline in 2QFY17 performance led to lower 1HFY17 normalised earnings of RM74.6m. This represents a decrease of -9.6%yoy. All in, Panasonic’s 1HFY17 financial performance came in at the lower end of expectation, accounting for 45.2% of our FY17 full year earnings estimate.

…despite higher 1HFY17 revenue. For 1HFY17, Panasonic recorded higher revenue of RM590.2m, an increase of +7.7%yoy. This was mainly attributable to higher sales in the domestic market for fan products in view of the recent launching of LED fan products

Impact on earnings. We maintain our revenue forecasts for FY17 and FY18. However, we cut our FY17 and FY18 profit margin assumptions mainly from the home appliance segment to better reflect the results thus far. Consequently, our FY17 and FY18 earnings estimates are revised down by -7.4% and -6.0% respectively.

Target price. Following our earnings revisions, we trimmed Panasonic target price to RM35.32 per share (previously RM36.18 per share). This is premised on PER18 of 13.5x and EPS18 of 261.6sen per share. The assigned PER multiple equates to the group’s 3-year average historical PER.

Maintain NEUTRAL. Despite stellar performance from fan product segment, the home appliance segment has posted weaker numbers. This has impacted the group’s overall performance. In addition, income from its 40%-owned associate, Panasonic Malaysia Sdn Bhd, continues to dwindle. All factors considered, we maintain our NEUTRAL recommendation on the stock.

Source: MIDF Research - 30 Nov 2016