INVESTMENT HIGHLIGHTS

• 1QFY20 normalised earnings declined by -8.0%yoy due to the lower contribution from the Middle East market

• However, this is partially mitigated by the encouraging sales growth from the Asean region

• Given the healthy cash level, we expect the group to maintain good dividend payout

• Maintain Neutral with a revised target price of RM37.20.

1QFY20 normalised earnings declined by -8.0%yoy. Panasonic Manufacturing Malaysia Bhd (Panasonic)’s 1QFY20 normalised earnings declined by -8.0%yoy to RM25.8m. This is below ours and consensus expectations accounting for 18.0% and 19.6% of full year FY19 earnings forecasts respectively. The declined in earnings was attributable to the reduction in export sales particularly from Middle East market. Notwithstanding, we expect that the earnings momentum will pick up pace in the subsequent quarters driven by: (i) higher sales from Asean region and; (ii) better profit margin.

Lower sales from the Middle East market. In 1QFY20, the home appliance products segments’ profit before tax (PBT) fell by - 20.9%yoy. This was mainly attributable to: (i) slower oversea demand, primarily from the Middle East, (ii) rising cost of raw material and, (iii) unfavourable product sales mix. Note that the oversea market constitutes 60% of total sales. Of this, Middle East, which is the second largest key market for Panasonic recorded a significant dropped in export sales of RM21.9m or -32.7%yoy. The increasing trade sanctions imposed by the United States of America on Iran as well as the overflooding of inventories in the Saudi Arabiia has caused the slowdown in export sales.

Higher sales from the Asean countries. Despite the decline in sales from the Middle East market, the higher sales recorded by ASEAN countries such as Vietnam, Philippines and Brunei has contributed to the growth in Asian market. This region has recorded an encouraging growth of +8.9%yoy to RM88.0m thanks to Panasonic actively effort to penetrate new markets especially in the ASEAN region. In addition, sales from the Malaysian market grew marginally by +0.6%yoy due to the sales of Fan products. The higher domestic sales is attributable to the: (i) promotional activities held for the Hari Raya festive season and; (ii) increased purchases at distributor’s level resuting from a possible price adjustment in the next quarter.

Impact to earnings. We are revising our FY19F and FY20F earnings forecasts downwards by -5.0% and -5.4% respectively to take into account the slower than expected recovery of sales from the Middle East market.

Target price. Our target price is revised to RM37.20 which is based on pegging the FY21 EPS of 265.7 sen per share to PER of 14.0x. The assigned PER multiple is the group’s three year average historical PER.

Maintain NEUTRAL. We are maintaining our NEUTRAL recommendation on the stock as we remain cautious on the expectation of a slowdown in sales from the middle eastern market in the near term. Nonetheless, we expect that the domestic and ASEAN market will sustain earnings into the future. In addition, the relatively weaker Ringgit bodes well for the group as a significant of its revenue transaction in done in the USD. Also, the group is targeting to achieve RM2.0b sales by 2023 via: (i) strengthening manufacturing capabilities through the completion its new buildings; (ii) strengthening design capabilities with the incorporation of new R&D companies; (iii) implement automation in reducing reliance on labour. This is expected to improve sales and profit margins to sustain its earnings growth in the long term. In addition, with cash and cash equilvalent at RM638.0m as at 1QFY20, we believe that the company is able to continue giving out good dividend payout.

Source: MIDF Research - 28 Aug 2019