KEY INVESTMENT HIGHLIGHTS

• 3QFY20 earnings rose by +21.6%yoy to RM47.0m in view of the reduction in operating and tax costs

• However, earnings was partially impacted by lower sales from domestic and export market

• We expect that the group’s continuous effort in controlling cost will sustain earnings growth in the near term

• Maintain NEUTRAL with a revised TP of RM30.66

3QFY20 normalised earnings rose by +21.6%yoy. Panasonic Manufacturing Malaysia Bhd (Panasonic)’s 3QFY20 normalised earnings rose by +21.6%yoy to RM47.0m. This bring its cumulative 9MFY20 earnings to RM86.0m (-0.7%yoy) which met ours but below consensus expectations accounting for 70.0% and 67.9% of full year FY20 earnings forecasts respectively. The significant improvement in earnings was attributable to the reduction in operating and tax costs.

Lower domestic and export sales. In 3QFY20, overall sales dropped by -7.1%yoy. This was attributable to the domestic sales dropped of - 15.3%yoy driven by the lower sales for both home appliances and fan products. Furthermore, export sales were lower due to a slowdown in demand, especially for home shower products stemming from the Thailand market. This resulted in the declined of -2.7%yoy from the Asian (excluding Japan) market.

Reduction in operating expenses and effective tax rate. Despite a reduction in sales, the group managed to reduce operating expenses by -8.7% or RM 23.3m. This was mainly attributed to lower cost of materials and other fixed costs. In addition, the 3QFY20’s effective tax rate was much lower at 10.4% (vs 3QFY19 of 20.5%) mainly due to the effect of capital allowance claim for certain new software development costs and adjustments to an overprovision of tax charge in prior period. These aforementioned factors have resulted in improved 3QFY20 earnings.

Impact to earnings. We are revising our FY20F, FY21F and FY22F earnings forecasts downwards by -4.0%, -3.8% and -3.6% respectively to take into account the prolonged drop in domestic demand and lower export sales from Thailand market.

Target price. Our target price is revised to RM30.66 which is based on pegging the FY21 EPS of RM2.19 per share to PER of 14.0x. The assigned PER multiple is the group’s three year average historical PER.

Source: MIDF Research - 27 Feb 2020