• Revenue grew but margin contracted

• Strong growth for the Home Appliance segment

• Fan and other products' performance dropped marginally

• Maintain NEUTRAL with a revised TP of RM35.75

Within our expectation. Panasonic’s earnings for 1QFY18 rose +3.3%yoy to RM39.6m. This accounted for 27.2% and 27.4% of our and consensus full year earnings forecast respectively. This is within expectation as in the past years, where the 1Q results is normally a strong quarter.

Revenue grew but margin contracted. The group 1QFY18 revenue increased by +10.1%yoy to RM327.8m mainly impacted by a stronger Home Appliance segment. Despite the increased in revenue, earnings increased modestly at +3.3%yoy as operating margin contracted by - 0.3ppts yoy to 15.4%. In addition, losses from the associated company contributed to the lower earnings in comparison to the profit of RM3.0m recorded in the corresponding quarter.

Strong growth for the Home Appliance segment. Home Appliances products’ revenue grew by +11.4%yoy mainly contributed by the increased in export sales to Vietnam and the Middle East region. The Vietnam market has seen good growth potential with its increasing purchasing power while the improvement in the economic environment contributed to the higher sales in the Middle East region. The profit before tax (PBT) increased by +11.2%yoy to RM19.8m. The higher profitability in the current quarter was mainly due to increase in revenue and absence of development and tooling costs that was incurred in the previous year’s corresponding quarter with the introduction of new range of rice cooker products last year.

Fan and other products' performance dropped marginally. The Fan and other products’ revenue grew by +9.1%yoy. The improvement in sales was mainly seen in ceiling fans products attributable to sales recovery from United Arab Emirates. Nevertheless, due to a tighter margin (a drop of -1.6ppts yoy to 16.4%), the Fan and other products’ segment achieved a PBT of RM29.7m, which was marginally lower by - 0.3%yoy. The lower earnings is attributable to the rising costs of raw materials as well as higher operation expenses.

Future outlook. Despite some signs of recovery in earnings driven by the export sales, we expect that the 2Q’s performance will be slight modest as the political tensions in the Gulf could cloud the economic outlook in the Middle East region and may affect the Company’s export revenue. Also, domestically the Company’s operations remain affected by the ongoing tight labour market, rising raw materials prices and volatile foreign currency exchange rates and rising household debts. Nevertheless the Company remains steadfast in its continued efforts to reduce overall production costs, increase productivity and strive to deliver satisfactory results for the current financial year.

Maintain NEUTRAL with a revised TP of RM35.75. We maintain NEUTRAL stance whilst rolling forward our valuation base year to FY19 with target price of RM35.75. This is based on pegging the FY19 EPS of 155.4sen per share to PER of 13.8x. The assigned PER multiple is the group’s two year average historical PER.

Source: MIDF Research - 24 Aug 2017