INVESTMENT HIGHLIGHTS

• 2QFY18 earnings below expectation at RM23.6m

• Home Appliance segment continues its strong growth

• Fan and other products' performance dropped

• Maintain NEUTRAL with an unchanged TP of RM35.75

Below expectation. Panasonic’s 2QFY18 earnings came in at RM23.6m. This brings its 6MFY18 earnings to RM63.2mm lagging expectations, accounting for 43.4% and 44.0% of our and consensus’ full year FY18 earnings forecasts respectively. Againts last year, revenue and earnings dropped -5.1% and -23.2% respectively while revenue and earnings dropped at a faster pace on a quarterly sequential basis at -15.3% and -40.3% respectively. The weaker than expected 2QFY18 performance was due to the: (i) earlier Raya Aidilfitri celebration which fell in June 2017 and; (ii) slower demand of products after Raya Aidilfitri.

Home Appliance segment continues its strong growth. Home Appliance segment continues its strong growth from the previous quarter. Its revenue grew by +13.7%yoy mainly contributed to the increase in export sales due to the: (i) sales recovery from the UAE as the economic environment in the Gulf improves and; (ii) prolonged rainy season in Vietnam which boosted the sales for home shower products. Consequently, the profit before tax (PBT) increased by +46.1%yoy to RM52.1m. The higher profitability in the current quarter was mainly due to: (i) the increase in export revenue and; (ii) absence of development and tooling costs that was incurred in the previous year with the introduction of new range of rice cooker products. Nevertheless, the higher cost of raw materials impacted profitability to a certain extent.

Fan and other products' segment performance dropped. The

Fan and other products’ segment dopped by -6.3%yoy which was mainly attributable to the: (i) declining demand from the domestic market and; (ii) a slowdown in government projects for installation of fans. Consequently, due to a tighter margin (a drop of -0.4ppts yoy to 17.9%), the Fan and other products’ segment achieved a PBT of RM54.9m, which is lower by -8.4%yoy. The lower earnings is attributable to the rising costs of raw materials as well as a higher operation expenses incurred. As the domestic demand is expected to be weaker, the segment is increasingly reliant on export sales particularly to the Middle East market to drive performance.

Prospects. We expect that the performance for FY18 will be affected by the: (i) strenghthening of Ringgit and weakening of USD as this will lower the translation gain from export revenue (Ringgit strengthened from MYR/USD 4.42 in April 2017 to MYR/USD 4.11 as of Friday 24th November 2017 ) and; (ii) the recent slow down in the growth of Malaysia Manufacturing Index at +5.7%yoy in September 2017 from a peak of +8.0%yoy in July 2017. Nevertheless, we expect the performance in FY19 will improve due to the: (i) completion of two new plants in 2018 and 2019 respectively which is expected to increase production capacity by 25% and; (ii) increasing demand from the Middle East as a result of better economic environment due to the higher crude oil prices.

Impact to earnings. Post earnings announcement, we are revising our FY18F earnings forecasts down by -5.82% as we believe the stronger Ringgit will have a stronger downside impact on export revenue than the benefit gain from a lower raw material costs. However, we are maintaining our FY19F earnings estimates as we expect that the pick-up in demand from the Middle East and additional capacity will assist in revenue and earnings growth going forward. Key risks to our earnings would most likely be; (i) rising raw materials prices; (ii) ongoing tight labour market and; (iii) continue political tensions in the Gulf could cloud economic outlook and affect company’s export revenue.

Maintain NEUTRAL with an unchanged TP of RM35.75. We maintain our NEUTRAL stance with an unchanged target price of RM35.75. This is based on pegging the FY19 EPS of 259.1sen per share to PER of 13.8x. The assigned PER multiple is -0.5 standard deviation discount to the group’s two year average historical PER. Due to the recent surge in share price, the current PER is now at 20x, which is significantly higher than the two year average and hence, we are expecting limited upside to its share price at this juncture.

Source: MIDF Research - 27 Nov 2017