• Underperforming home appliance segment

• Fixed dividend payout despite higher cash balance

• Some products will see a stronger performance in FY17

• Maintain NEUTRAL with a unchanged TP of RM32.40

Underperforming home appliance segment. To recall, the home appliance segment’s FY17 earnings were impacted by lower PBT margin as operating costs increased at a faster pace which resulted in FY17 performance coming in lower than expectation. The poor result of the segment is due the underperformance of its products such as: (i) rice cookers segment which is struggling to reach breakeven level due to the higher cost of production as a result from the transfer of manufacturing activities from Thailand to Malaysia and; (ii) vacuum cleaner and iron segment recorded a lower sales as its main market i.e. the middle east sales (accounted for 80% of total sales) which has not fully recovered in FY16.

Dividend payout will remain fixed despite higher cash balance.

As at 4QFY17, the cash and cash equivalents stands at RM602.43m (+0.1%yoy) which is a significant 60% of total assets. In addition, all of its subsidiaries are in net cash positions, hence intercompany lending is unnecessary at this juncture. Approximately 80% or RM500m of the cash is placed in fixed deposit instruments at local financial institutions (FIs) yielding average interest income of 3.5% annually. The reason for such high cash hoarding is due to: (i) the expansion project where RM100m is needed in the next two years and; (ii) as part of the group strategy in hedging activities as well negotiating better interest rates from FIs. Therefore, despite the cash pile build-up, the company’s dividend payout ratio will still be fixed at 60% of PAT.

Future outlook. Despite the lacklustre FY17 results, we opine that there will be an improvement in FY18 financial performance as rice cookers segment is targeted to breakeven from losses incured in FY17 while vacuum cleaner could see some recovery as of 1QFY18. In contrast, the sales from Fans segment might slow down this year due to lower project sales from the government for the installation of fans. In addition, given that 60% of sales is to the overseas market, a stronger Ringgit this year will reduce the FOREX gain albeit lowering the cost of purchasing raw materials. Nonetheless, recent rise in prices of aluminium and copper reduce the benefit of having a stronger Ringgit. Hence, we remain neutral on the company’s future prospects.

Maintain NEUTRAL with an unchanged TP of RM32.40. Maintain NEUTRAL with unchanged Target Price of RM32.40. Post-meeting, we are making no changes to our earnings forecast and TP, which is based on pegging forward PER of 13.5x against FY18 EPS pf 240sen per share. The assigned PER multiple is the group’s three year average historical PER.

Source: MIDF Research - 19 Jun 2017