We expect challenges from muted sales, rising raw materials and higher operating expenses to persist for the remainder of the year. The group is expecting to incur about 6-7% revenue impact from the termination of rice cooker and kitchen appliances products. Note that the rice cooker segment has been suffering losses for the past years. As for the flood incident, the insurance claimed so far only covers 49% of the total loss with remaining amount still under review. To mitigate the rising costs, there will be further price hikes for its products in 2H22. Reiterate SELL with unchanged TP of RM22.33 based on unchanged 17x PE multiple on FY23 earnings.
Below Are Key Takeaways From Our Recent Meeting With PMM.
Recap. Recall that 4QFY22 recorded core PAT of RM15.2m (QoQ: +0.2%, YoY: - 66.7%) which brought FY22 sum to RM50.5m (-58.7% YoY). The disappointment was no thanks to (i) lower-than-expected sales from operations disruptions; and (ii) margin compression from elevated raw materials. EBIT was lower by -88% YoY attributable to lower sales, rising raw materials and higher operating expenses due to write -off damaged inventories and repairs of affected facilities from the flood incident.
Termination of non-profitable segment. We gathered that there was also restructuring costs incurred amounting to RM12.2m for the termination of the rice cooker products, which have been suffering losses for the past years attributable to the high raw material costs which eroded profit margins. Additionally, some kitchen appliance products will also be terminated in FY23 on the back of the realignment of global production for the Panasonic Group. Based on management guidance, the termination of rice cooker and kitchen appliances will impact its revenue by 6% and 7%, respectively.
Flood insurance claim still under negotiation. We gathered that the company was able to resume full operation from March 2022 after the flood incident in SA2 plant in Dec 2021. Despite that, the group had incurred substantial losses from damaged inventories and facilities, coupled with the absence of sales from the operation disruption in the FY22. The total losses amounted to approximately RM24.7m and we understand that the insurance claimed so far only covers 49% of the total loss with remaining amount still under review. Currently, the utilization rate for fan segment is running at 85% and vacuum cleaner is at 90%.
Further price hikes on the card. PMM main raw materials which include copper, aluminium and steel have recorded an upward trend of 16%-84% as compared to Apr 2021. PMM have increased selling prices by 5%-10% for certain models to mitigate the impact of rising input costs. The group is also expecting to roll out similar price hikes for other products in 2H22. Despite that, we opine that the group will only be able to partially pass on the costs to consumer and would still have to face eroding margins. Additionally, the group is also looking further to automate its production in light of rising labour costs due to new minimum wage policy and labour supply crunch.
Forecast. Unchanged.
Maintain SELL, with unchanged TP of RM22.33 based on 17x PE multiple on FY23 earnings. We reckon that the multiple headwinds to persist and would pose a challenge to PMM earnings moving forward.
Source: Hong Leong Investment Bank Research - 2 Aug 2022
