Dark clouds on the horizon
- PMM’s 1QFY3/23 core net profit of RM8.2m (-53.6% yoy) came in below our expectations due to larger-than-expected margin compression on rising cost.
- We expect PMM to face sustained headwinds for the rest of the year on i) escalating cost pressures, iii) tepid demand, and iv) smaller product portfolio.
- Downgrade the stock to a Reduce with a lower TP of RM20.50 (15x CY23F P/E) as near- to medium-term earnings outlook remains under pressure.
Disappointing 1QFY3/23 results; below expectation
Panasonic Manufacturing Malaysia Berhad’s (PMM) 1QFY23 revenue dropped 3.9% yoy to RM243.7m due to lower export sales (-6.9% yoy), albeit mitigated by higher sales in Malaysia (+1.6% yoy). Nonetheless, 1QFY23 core net profit (CNP) fell at a greater pace to RM8.2m (-53.6% yoy), which came in below our expectations at 10.4% of our FY23 estimate and 10.7% of Bloomberg consensus owing to larger-than-expected margin compression with EBITDA margin contracting to 4.1% (-6.8% pts yoy). The lower EBITDA margin was mainly attributable to i) rising raw material costs, ii) higher labour cost and iii) higher production costs due to supply disruption for imported parts given the lockdown in China as plants were unable to consistently run at optimum levels (>c.90%).
Persistent elevated cost pressures to continue to weigh on margins
We expect PMM to continue to face margin compression for the rest of the year due to persistently elevated costs of raw materials, such as copper/aluminium/steel, which rose 16%/59%/84% in Mar 22 vs. Apr 21, and tight supply of imported parts from China as the country remains under Covid-19 lockdowns, potentially leading to higher production cost. In addition, the hike in minimum wage to RM1,500/month from May 22 onwards will add upward pressure on operating expenses. On top of that, we believe there is limited ability for PMM to further hike product prices to pass on the higher costs to consumers given the expected weaker discretionary spending due to high inflation and rising interest rates.
Topline growth to be constrained by smaller product portfolio
While we believe PMM’s sales will gradually recover as it is able to fulfil its backlog orders, we are cognisant that topline growth will be constrained by its smaller product portfolio size moving forward. This is due to the termination of its rice cooker business effective 31 Mar 22 (c.6% of FY22 revenue) and that of other kitchen appliances (blenders, food processors and slow cookers; 7% of FY22 revenue) effective 30 Sep 22, which led to the home appliance segment’s 1QFY23 sales falling 30.3% yoy to RM60.4m.
Downgrade to Reduce call with a lower TP of RM20.50
We downgrade PMM to a Reduce from Hold as we believe its near- to medium-term earnings outlook remains challenging amidst a weaker operating environment. We cut our FY23-25F EPS by 17.6-25.9% to account for our 2.0-2.4% pts lower gross margin assumptions and higher total operating expense assumptions. Accordingly, our TP is reduced to RM20.50 (15x CY23F P/E, 15-year average P/E). We also lower our FY23-25F dividend assumption by 63.0-65.7% to 85-115 sen (payout ratio of 63-88%).