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This article first appeared in The Edge Financial Daily on August 27, 2018

Panasonic Manufacturing Malaysia Bhd
(Aug 24, RM40)
Maintain neutral with a higher target price (TP) of RM43.12:
Panasonic Manufacturing Malaysia Bhd’s (Panasonic) first quarter of financial year 2019 (1QFY19) normalised earnings dropped by 30.3% year-on-year (y-o-y) to RM28 million. The lower earnings were mainly attributable to the lower sales in the export market for both the home appliance and fan product segments. Compared to our 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 expectations as we expect stronger earnings in the coming quarters.

Both home appliance and fan products segments’ profit before tax for 1QFY19 were lower by 31.4% y-o-y and 16.7% y-o-y 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 the domestic market.

Despite the slowdown in demand from the Middle Eastern market such as United Arab Emirates and Saudi Arabia which, in aggregate, contributed approximately 24% 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 ii) estimated annual tax savings of RM8.5 million as a result of double tax deduction in regards to research and development.

We are rolling forward our valuation base year to FY20 and derive a new TP of RM43.12 (previously RM38.15). This is based on pegging the FY20 earnings per share of 312.5 sen per share to price-earnings ratio (PER) of 13.8 times. The assigned PER multiple is the group’s two-year average historical PER.

We expect the contribution from the export market to remain weak. We believe the uncertain political climate from the Middle Eastern market could continue to impede consumer spending. On the contrary, the slowdown in export market will be partially supported by the anticipation of  a short-term surge in dometic spending in view of tax holiday spending. — MIDF Research, Aug 24

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