KEY INVESTMENT HIGHLIGHTS

• 2QFY20 earnings was lowered by -16.5%yoy to RM50.8m in view of reduction in domestic sales

• However, this is mitigated by higher sales from ASEAN countries such as Vietnam, Brunei and Singapore

• We are expecting a rebound in 2HFY20 earnings, due to higher sales from the ASEAN region and better profit margin

• We expect the group to maintain its dividend payout

• Maintain NEUTRAL with a revised TP of RM31.92

Reduction in domestic sales. Panasonic Manufacturing Malaysia Bhd (Panasonic)’s 2QFY20 normalised earnings declined by -16.5%yoy to RM50.8m. This is below ours but within consensus expectations accounting for 41.7% and 45.5% of full year FY20 earnings forecasts respectively. The decline in earnings was attributable to the reduction in domestic sales. However, this was mitigated by the improved export sales particularly from the ASEAN market. Going forward, we expect that the earnings momentum will pick up pace in the subsequent quarters driven by: (i) continue improvement in sales from ASEAN region and; (ii) better profit margin.

Upward adjustment in product prices. In 2QFY20, domestic sales dropped by -16.4%yoy to RM119.6m mainly attributable to lower sales for both home appliances and fan products. We believe this is due to the price adjustment that was made during the quarter. This is further compounded by the high base effect as significantly higher sale was recorded in the last corresponding period caused by the zero-rating of Goods & Services Tax (GST).

Continued drop in sales from the Middle East market. Meanwhile, the Middle East, which is the third largest key market for Panasonic (historically 20% contribution to revenue), recorded a significant dropped in export sales of -22.5%yoy. The increasing trade sanctions imposed by the United States of America on Iran as well as the overflooding of inventories in the Saudi Arabia has caused the slowdown in export sales since the end of FY18. Nevertheless, there is a sign of improvement in sales when compared on a sequential quarterly basis (+15.7%qoq).

Higher sales seen from the ASEAN countries. Despite the decline in sales from the domestic and Middle East market, the higher sales recorded by ASEAN countries such as Vietnam, Brunei and Singapore has contributed to the growth in Asian market. This region has recorded an encouraging growth of +24.1%yoy to RM98.2m thanks to Panasonic actively effort to penetrate new markets especially in the ASEAN region. To date ASEAN region is the second key market for Panasonic with a contribution to revenue of about 30.0%.

Source: MIDF Research - 26 Nov 2019