INVESTMENT HIGHLIGHTS

• 1HFY19 earnings grew marginally by 4.4%yoy to RM103.0m, which is below our and consensus expectations

• Declined in export revenue from home appliance segment

• Short term prospect remain challenging in light of lower export and local demands

• Dividend yield remain attractive at approximately four percent, in-line with its historical dividend payout ratio

• Maintain NEUTRAL with a revised target price of RM38.08

Below expectations. Panasonic Manufacturing Malaysia Bhd (Panasonic) 1HFY19 grew marginally by +4.4%yoy to RM103.0m. Nonetheless, this is below ours and consensus’ expectations accounting for 37.3% and 42.3% of full year FY19 earnings forecasts respectively. Initially we are expecting a stronger 1HFY19 earnings driven by the tax holiday spending. The lower than expected earnings contribution was mainly attributable to the lower export sales for its home appliance products.

Declined in export contribution. In 1HFY19, the home appliance products segments’ profit before tax (PBT) fell by -22.6%yoy. This was mainly attributed to (i) lower sales of home appliance products from the Middle East and Vietnam due to slowdown in demand; (ii) rising cost of raw material; and (iii) unfavourable product sales mix. However, these was mitigated the strong 1HFY19 PBTgrowth in the fan products segment of +9.8%yoy driven by the higher sales in the domestic market. Overall, domestic market grew by +16.7%yoy while export, accounting for about about 60.0% sales, dropped by -8.8%yoy.

Prospect. Due to the slowdown in export demand from overseas market such as the Middle Eastern market which contributed historically about 24.0% to total revenue, we expect that the outlook for the group will be challenging, In addition, the demand in the domestic market is expected to slow down post tax holiday period. Nonetheless, this will be partially mitigated by the; (i) higher translation gain for export revenue as Ringgit is now weaker against the USD; (ii) prudent cost management; and (iii) estimated annual tax savings of RM8.5m as a result of double tax deduction in regards to research and development expenditure.

Impact to earnings. We are revising our FY18F and FY19F earnings downwards by -17.1%yoy and -11.7%yoy espectively in order to take into account the lower export contribution going forward.

Target price. We are revising our target price to RM38.08 (previously RM43.12). This is based on pegging the FY20 EPS of 276.0sen per share to PER of 13.8x. The assigned PER multiple is the group’s two year average historical PER.

Maintain NEUTRAL. Whlile the export market remains the main driver of the company’s earning growth, the export demand is expected to remain volatile. Nevertheless, we believe that in the short term, earnings accretion will be driven by: (i) higher translation gain due to the relatively weaker Ringgit; and (iii) lower tax expense. In addition, dividend yield for the stock remain attractive at approximately 4%. With a strong cash position, we expect the group will be able to maintain its historical dividend payout policy of 60.0%. All in, we are reiterating our NEUTRAL recommendation on the stock.

Source: MIDF Research - 27 Nov 2018