INVESTMENT HIGHLIGHTS

• 1QFY19 earnings dropped by -36.5%yoy to RM25.1m

• Declined in export revenue from both home appliance and fan products segment

• However, expect stronger earnings in the coming quarters

• Maintain NEUTRAL with an adjusted target price of RM43.12

A weak 1QFY19 earnings. Panasonic Manufacturing Malaysia Bhd (Panasonic) 1QFY19 normalised earnings dropped by -30.3%yoy to RM28.0m. The lower earnings was mainly attributable to the lower sales in the export market for both the home appliance and fan products segments. Compared to ours and consensus expectations, the normalised earnings accounted for 16.7% and 18.9% of full year FY19 earnings forecasts respectively. Nonetheless, this is broadly within expectation as we expect stronger earnings in the coming quarters.

Declined in export contribution. Both home appliance and fan products segments’ profit before tax (PBT) for 1QFY19 were lower by - 31.4%yoy and -16.7%yoy respectively. This was mainly attributable to slower demand of home appliance products from the Middle East market. However, it was partially mitigated by the higher sales of home shower products in Asean countries as well as domestic market.

Earnings is expected to pick up in the coming quarters. Despite the slowdown in demand from Middle Eastern market such as UAE and Saudi Arabia which, in aggregate, contributed approximately 24.0% to the group’s total revenue, we believe that earnings will further improve going forward. This is driven by: (i) tax holiday spending in the domestic market and; iii) estimated annual tax savings of RM8.5m as a result of double tax deduction in regards to research and development.

Target price. We are rolling forward our valuation base year to FY20 and derive a new target price of RM43.12 (previously RM38.15). This is based on pegging the FY20 EPS of 312.5 sen per share to PER of 13.8x. The assigned PER multiple is the group’s two year average historical PER. Maintain NEUTRAL. We expect the contribution from the export market to remain weak. We believe the uncertain policitical climate from the Middle Easter market could continue to impede consumer spending. On the contrary, the slowdown in export market will be partially supported by the anticipation of short term surge in dometic spending in view of tax holiday spending.

In addition, we expect the group will continue to benefit from the weaker Ringgit and expected lower effective tax rate. At this juncture, dividend yield is rather attractive at more than four percent. All factors considered, we are maintaining our NEUTRAL recommendation on the stock.

Source: MIDF Research - 24 Aug 2018