If a shareholder had bought 1,000 shares in Panasonic Manufacturing Malaysia Berhad (“Panasonic Malaysia”) (KLSE: PANAMY) when it was listed in 1966, and assuming the shareholder had subscribed for its rights issue of 350 shares in 1975 and did not sell any of the company’s shares, he would be holding a total of 19,384 shares (inclusive of 18,034 bonus shares) worth RM742,407 based on the market price of RM38.30 as at 11 June 2019. In addition, he would have received total gross cash dividends of RM520,967 with a capital outlay of RM1,350 only. The dividends received/ receivable and the appreciation in the market value of its shares translates to a remarkable compound annual growth rate (“CAGR”) of 14.5% on the nominal value basis.
(Source: 2019 annual report)
Given such rewarding returns, we will in this article, take a closer look at the business, management and financial aspects of the Panasonic Malaysia, to assess whether the company remains a worthwhile investment going forward.
Panasonic Malaysia operates from two factories which are Section 15 (SA1 Plant) and Section 23 (SA2 Plant), Shah Alam. The new office building was completely occupied by the end of January 2019 while the construction at SA2 Plant is expected to be completed by the year 2020. On the operational front, management has announced the expansion of a new wing at its SA2 Plant, which is expected to increase production capacity by 18%. Panasonic Malaysia plans to use the space to increase its capacity of producing appliances parts in-house in order to reduce its dependency on external part makers.
(Source: company’s website)
The company as an electrical appliance manufacturer has a unique portfolio where it manufactures a total of 11 products for two Divisional Companies, namely Appliances and Life Solutions, Panasonic Corporation. Products like home shower, vacuum cleaner, iron, bidet, rice cooker and kitchen appliances are manufactured for Appliance Company while the electric fan, ceiling fan, ventilating fan and dish dryers are manufactured for Life Solutions Company.
These products are distributed within Malaysia and also exported overseas to other countries in Asia, the Middle East, North America and Europe. For the financial year (“FY”) ended 31 March 2019, domestic sales contributed approximately 43% of total revenue, followed by Asia (excluding Malaysia and Japan) at 31%, the Middle East at 20%, and the remaining 6% sales are from other countries including Japan. The graph below shows the company’s revenue by geography for FY2014 to FY2019.
The company’s strategy is to be the No. 1 Small Home Appliance Factory in Asia, conceptualising the slogan to be “A Giant in a Small Island”, which means to gain significant market share in niche businesses. Being a key player in this market, the company aspires to widen its presence in the market, especially for key products such as ceiling fans, home showers and kitchen appliances.
Panasonic Malaysia also aims to provide value to customers in residential spaces such as bathrooms, kitchens, living rooms, and bedrooms. To do this, the company is focused on developing key products with high growth potential such as slow cookers, meat grinders and blenders with enhanced features and new design for small kitchen appliances. The company is in the process of developing smart home products under the Panasonic brand, and hope to release its first product in the near future.
One of the main issues faced by the manufacturing industry today is the rising cost of labour and labour shortage in the market. To overcome these issues, the company has taken steps to invest in the use of automation and robotic systems to reduce the reliance on human labour. In the Life Solutions division, a total of 17 units of robotic systems have been installed to help facilitate the accelerate work in several parts of the production processes. The use of these 17 units of robotic systems has resulted in savings of approximately RM1.0 million per annum.
The company has also invested in an Auto Brazing system in the Appliances division. After the installation of 5 units of robotic systems, the company is able to produce more stable quality tanks at double the output rate and give further savings of approximately RM0.6 million per annum. With the successful implementation of these automated systems, the company is looking into further expansion of similar automation in other manufacturing processes.
Panasonic Corporation (Japan) (TYO:6752) is the ultimate holding company of Panasonic Malaysia. The following is a list of its top 20 shareholders, which is extracted from the company’s 2019 annual report. We note the presence of various institutional shareholders which in our experience is a possible indication of a generous dividend payer.
(Source: 2019 annual report)
Measure 1: Growth in revenue and profits
Panasonic Malaysia’s growth in revenue and net profit after tax is modest, at CAGR of 4.64% and 5.54% respectively from FY2014 to FY2019. As growth in net profit after tax is slightly higher than growth in revenue, management seems to be efficient in managing its costs.
Measure 2: Profitability
Panasonic Malaysia enjoys decent net profit margins of 12.2% – 18.9%. Return on equity ratios ranged from 9.0% – 13.5% for the past six years indicating proper usage and allocation of shareholders’ funds.
Measure 3: Liquidity
Panasonic Malaysia’s management is extremely conservative. The company has cash and cash equivalents of approximately RM623.31 million as at 31 March 2019 and zero borrowings. In fact, its cash and cash equivalents is roughly 30.24% of its current market capitalisation of RM2.05 billion!
Moreover, the cash and cash equivalents of RM623.30 million consist of RM480.00 million in fixed deposits and RM143.31 million of cash and bank balances. The fixed deposits are the placement of funds with a related company, Panasonic Financial Centre (Malaysia) Sdn Bhd, where the weighted average interest rate of fixed deposits was effectively 3.91% in FY2019. We would prefer management to put these monies to better use to generate high returns for shareholders.
Round 4: Dividends payout
The company has been consistently paying out dividends every year. In fact, its dividend per share has increased from approximately RM0.694 per share in FY2014 to RM2.262 per share in FY2019. This shows us that its business is cash generative.
In fact, the company has a negative cash conversation cycle throughout FY2014 to FY2019. This means that the company needs less time to sell its inventory (or produce it from raw materials) and receive cash from its customers compared to the time in which it has to pay its suppliers. Think of it as an interest-free way to finance operations through “borrowing” from suppliers.
Release of 3Q 2020 financial results
While writing this piece, Panasonic Malaysia released its financial results for the third quarter ended 31 December 2019. A snapshot is enclosed.
The company’s revenue for the nine months ended 31 December 2019 was lower by RM54.9 million or 6.1% as compared to the previous year’s corresponding period mainly due to lower domestic sales for both home appliances and fan products and lower export sales mainly to the Middle East market. Despite the lower revenue, the company achieved a higher combined profit before tax of RM107.3 million or 0.7% as compared to the previous year’s corresponding period mainly due to lower cost of materials, improved profit margins for certain products and reduction in fixed costs.
The company opined that going forward domestic growth may be impacted by the recent politic developments which have created uncertainties and volatility in the market. It also highlighted that the Covid-19 outbreak in China, it remained unresolved, may expose the company to supply chain risks as certain materials and parts are sourced from China.
Nevertheless, the company will continue to strengthen its manufacturing capabilities through the continued expansion of robotics and automation systems in its facilities and enhancement in the IT systems to improve the company’s productivity.
With a closing share price of RM33.70 as at 21 February 2020, Panasonic Malaysia is trading at a price of earnings (PE) ratio of 19.58, with an indicative yield of 6.71%. In times of uncertainty, investors looking for steady dividend distributions can pay close attention to this company.
(Source: Google Finance)