INVESTMENT HIGHLIGHTS

• Completion of plants expansion within stipulated timeline

• Bringing back outsourced activities in-house

• Entitled to additional tax incentive in FY19

• Maintain our BUY recommendation with a revised TP of RM38.16

Completion of plants expansion within stipulated timeline. The expansion of Panasonic Manufacturing’s existing SA1 plant is expected to be completed by the end of 2018. Along with the expansion of SA2 plant by 2020, total production capacity is expected to increase by 25%. This is within the group’s stipulated timeline.

Bringing back outsourced activities in-house. While management reiterated that a solid strategy to utilise the additional production space is yet to be finalised, the management explained that another option to utilise the additional space is to transfer back some of the previously outsourced manufacturing in-house. Currently, about 15%-20% of manufacturing activities such as plastic injection for smaller parts are being outsourced as existing plants utilisation rate is close to full capacity. Either way, this will lead to further improvement in the group’s profit margin.

Entitled to additional tax incentive in FY19. Currently, the group is enjoying tax incentives from promotion of exports which entitled them to a double deduction on qualify expenses. Going forward, the qualifying expenses for the double deduction will be expanded as the engineering unit will be transferred in-house and hence, the group is able to enjoy double deduction from the research and development activities that will be undertook by this unit. As guided by the management, this new incentive will lower the effective tax rate by 4%- 5% from FY19.

Impact to earnings. Due to the lower effective tax rate expected in FY19, we revised our forecast for FY19 higher by +4.4%.

Maintain our BUY recommendation with a revised TP of RM38.15. We maintain our BUY recommendation with a revised target price of RM38.16 (previously RM37.00). This is based on pegging the FY19 EPS of 276.5sen per share to PER of 13.8x.

Source: MIDF Research - 26 Apr 2018